How much have we really lost this year? The net worth of UK households may have shrunk by an astonishing £1.2 trillion, or £50,000 per household, in just twelve months.
You're probably tired of articles with massive figures in their headlines so I should apologise for that up front. Most of the time these headline numbers are unimaginably vast and provided with so little context that they are virtually meaningless. Here I'm going to take a stab at assessing just how much money we've actually lost in 2008. Brace yourselves because it's not too pretty.
Introducing the Blue Book
Each year the Office for National Statistics produces the `Blue Book' which show the national accounts of the UK. We've looked at it a few times in the past here on the Fool.
It's split into six sectors: public companies, private companies, financial companies, central government, local government and households/not-for-profit organisations.
The first five sectors have a negative net worth, meaning their debts are greater than their assets. This isn't a credit crunch phenomenon though. They were worth a negative £0.7 trillion in 2000 and a negative £0.5 trillion in 2007.
Home is where is the money is
The sector for households/not-for-profit organisations (i.e. you, me, everyone else and charities) is where all the money is. At the end of 2007 we were worth almost £7 trillion, or some £280,000 per household.
I'm not sure how much is tied up in charities and other not-for-profit organisations. Some of the largest charities such as the RSPCA and NSPCC have assets of £200m and £100m respectively, so we can probably assume that the vast majority of this £7 trillion relates to households.
The Blue Book showing the figures for the end of 2008 won't be published for several months but we can make a guess at how it might look. The figures for 2000 and 2007 are official while those for 2008 are my own estimates.
| UK household wealth | 2000 | 2007 | 2008 |
|---|---|---|---|
| Residential housing | 2.0 | 4.1 | 3.5 |
| Other fixed assets | 0.2 | 0.2 | 0.2 |
| Currencies and deposits | 0.6 | 1.1 | 1.1 |
| Shares, funds and securities | 0.8 | 0.7 | 0.5 |
| Life assurance and pensions | 1.6 | 2.2 | 1.8 |
| Mortgages | (0.6) | (1.2) | (1.2) |
| Other debts | (0.1) | (0.2) | (0.2) |
| Total | 4.5 | 6.9 | 5.7 |
| Ratio of debts to assets | 13% | 17% | 20% |
I've no idea how accurate the figures in the Blue Book actually are. However, assuming they are measured consistently over time, the trend in each figure should be reasonably meaningful. They are also aggregate figures so don't show any information about the distribution of wealth or how that's changed. I've also left out intangible assets of around £0.6 trillion as it's not particularly clear how these are calculated.
2008 in numbers
Anyway how did I come with up the figures for 2008? I've assumed our housing wealth has fallen by 15%. This is probably what the Land Registry figures will show if we have further falls of 2% in both November and December. Housing still accounts for half of total assets, even after this decline.
I've assumed shares and other securities have fallen by 30%, which is roughly the annual return of the UK stock market since the start of the year. I've only sliced 20% off pension funds and life assurance as these have substantial holdings of gilts and bonds which have fared better than shares in the last twelve months.
The money we owe on mortgages and other debts has increased a little this year according to the Bank of England but it gets lost in the rounding.
I've assumed both currencies and deposits plus other fixed assets have remained the same. In case you were wondering other fixed assets includes items like agricultural and commercial property plus vehicles.
Putting this altogether gives us a fall in our net wealth of £1.2 trillion, or £1,200,000,000,000 if you prefer to see it in full. With around 25 million households in the UK, that's a decrease of just under £50,000 per household. On top of that the pound has weakened considerably this year, so you couls argue the fall in our purchasing power is even greater.
Ouch, ouch and triple ouch!
But don't despair.....
There is some good news. The fall in 2008 takes our net worth back to where it was around the middle of 2005. That's uncomfortable rather than a disaster. We're still substantially richer than we were in 2000 and our net wealth should soon resume its usual upwards course.
Also, even though personal debt is a problem, our savings have been rising almost as quickly. Our debt has doubled from £0.7 trillion in 2000 to £1.4 trillion while currencies and deposits went from £0.6 trillion to £1.1 trillion.
Our debt to asset ratio has been rising in the last few years but at 20% it shouldn't be terminal. With a little credit shrinkage, you'd expect this ratio to fall over the next five years. It's fair to say that household finances are in far better than shape than those of the government and this will remain the case for some time to come.
Our balance sheet is still a little lopsided in my view. There is too much in property and too little in net savings and other investments. Let's hope we can address this over the next few years. Overall, although it's been a bad year for household finances, we still have a lot left in the kitty and enough to deal with the current financial turmoil.