changes in the level of household wealth affect people's willingness and
ability to spend on goods and services?
effects of rising real asset values on consumer expenditure are difficult
to quantify, but important. Trends in consumer wealth are taken into account
by the Bank of England when deciding the appropriate level of interest
rates for the economy.
value of housing and other assets
(shares and bonds) is rising faster than income, individuals see a rise in
their net worth (the difference between the value of their assets and
liabilities). This increases consumer confidence and causes an upward shift
in the consumption function.
asset prices fall consumers can be left with a net worth problem. That is,
they have liabilities or debts that exceed the value of their assets
(negative equity). To eliminate this problem consumers have to repay debts by
perhaps the most important asset owned by the majority of the population.
When house prices are rising and activity in the housing market is growing we
often see a boost to total consumption. An appreciation in housing values
leads to an increase in personal sector wealth and boosts consumer
confidence. An increase in the volume of housing transactions is good news
for complementary sectors to the housing market including estate agents,
furniture retailers, DIY stores and local contractors.
As mutual building societies and insurance companies have converted to public
companies their members have received share windfalls. If recipients hold
onto these shares they experience a rise in their net worth. This could
indirectly boost consumption.
if they sell the shares, the cash raised can be spent directly on goods and
services. The windfall can also be used to pay off existing debts and allow
increased spending in the future. 1997 was a record year for Windfall
payments - they totalled over £36 billion pounds. Windfalls have continued
through 1998 and 1999 although not on the same scale.
house prices and growing consumer confidence arising from an increase in
personal sector wealth are two reasons why the annual growth of consumer
spending accelerated during 1999. This is shown in the chart above. The
pick-up in household demand was cited by the Bank of England when they
started to raise interest rates in September 1999.