Property assets cushion negative wealth effect

Property assets, mainly housing, have provided a significant offset to the loss of wealth due to the decline in the equity market in the last few years, according to research by Standard Life Investments.

In the latest edition of &#39Global Insight&#39, its monthly investment review, Standard Life Investments examines the impact of falling equity markets upon household wealth and the potential effect on consumer spending.

Andrew Milligan, head of global strategy at Standard Life Investments, says: “There is little doubt that the decline in equities over the last couple of years has had a negative impact on wealth in the US and the UK, but in terms of the outlook for consumer spending it is important to put this into context.

“Equities as a proportion of household wealth amounts to about 30% in both the US and UK, and property about 20%. The rise in house prices has given overall wealth a boost in recent years, and it has made a significant contribution to reducing the negative wealth effect that might otherwise have followed from the steep fall in the equity market. For example, the UK housing market has risen by 40% over the past three years when equities have fallen by 30%. Our research also shows that housing wealth is spread more evenly over the population than equities, which are more concentrated amongst the higher income groups. As these groups have a lower propensity to consume, the strength in housing will provide a bigger cushion to aggregate consumer spending than the overall figures suggest.

“It is also important to remember that wealth has only fallen back to a more normal multiple of income after rising abnormally during the technology bubble. The overall trends in net wealth over the last ten years or so are still favourable, and as long as house prices remain steady consumption should hold up.”

The report adds that property assets, mainly housing, have provided a significant offset to the loss of wealth due to the decline in the equity market in the last few years, according to research published today by leading fund management house, Standard Life Investments.

Milligan adds: “There is little doubt that the decline in equities over the last couple of years has had a negative impact on wealth in the US and the UK, but in terms of the outlook for consumer spending it is important to put this into context.

“Equities as a proportion of household wealth amounts to about 30% in both the US and UK, and property about 20%. The rise in house prices has given overall wealth a boost in recent years, and it has made a significant contribution to reducing the negative wealth effect that might otherwise have followed from the steep fall in the equity market. For example, the UK housing market has risen by 40% over the past three years when equities have fallen by 30%. Our research also shows that housing wealth is spread more evenly over the population than equities, which are more concentrated amongst the higher income groups. As these groups have a lower propensity to consume, the strength in housing will provide a bigger cushion to aggregate consumer spending than the overall figures suggest.

“It is also important to remember that wealth has only fallen back to a more normal multiple of income after rising abnormally during the technology bubble. The overall trends in net wealth over the last ten years or so are still favourable, and as long as house prices remain steady consumption should hold up.”