Wealth spurt unlikely to offer much aid to the consumer

Abstract

▀ UK households are wealthier than ever, thanks to continued growth in house prices and a buoyant stock market. However, the nature and distribution of that wealth means that support for consumer spending from a ‘wealth effect’ is likely to be both small and less than in the past. ▀ In Q4 2016, households' holdings of owner‐occupied property and net holdings of financial assets amounted to £9.2tr, almost 8% up on the level a year earlier. This was equivalent to 719% of annual household gross disposable income, a near‐record high. ▀ A long‐established feature of economics is the concept of a ‘wealth effect’ – the premise that faced with rising wealth levels, households feel more comfortable and economically secure and hence spend more. But the economic literature differs on how large this effect is. ▀ Our own Global Model suggests that the wealth effect is modest, with a 10% rise in wealth boosting consumer spending by only around 0.2%. One reason is that about half of financial wealth consists of highly illiquid assets in pension funds. But this component has recently been the biggest source of growth in wealth. ▀ Given differences in the propensity to consume out of income and wealth, the concentration of financial and housing assets among better‐off households will also act to neuter the size of any wealth effect. The wealthiest one percent of households hold around 20% of household wealth. But the bottom quartile owns only 1.5%. ▀ Meanwhile, the housing market has created an ever‐greater concentration of wealth. The share of households owning their own property fell from 71% to 63% in the decade to 2015. But the share of private renters more than doubled in the same period, from 9% to just over 19%. And the pre‐crisis appetite to finance consumption by borrowing against the value of property shows no sign of returning.