How The Credit Crunch Cost You £31,000

The international credit crunch, and the subsequent recession, brought the banking industry to the edge of catastrophe and led directly to pay cuts, redundancies and rapidly-rising unemployment throughout the UK.

For those who have lost their jobs, and possibly their homes, the effects on their personal finances have been all too obvious.

But there has been a wider effect on the accumulated personal wealth of the nation.

The BBC can reveal that in the course of 2008 alone, £815bn was knocked off the wealth of households in the UK.

That amounted to an average of nearly £31,000 for every household in the UK.

Going down

The huge dent to personal wealth last year has been calculated, for the first time, by the Halifax bank, exclusively for the BBC.

The biggest impact was from the sudden slump in house prices which led, according to government figures, to a 9% cut in the market value of all residential property, from £4,077bn to £3,693bn.

Taking into account the effect of a 3% rise in the value of the mortgage debts held by home buyers, to £1,225bn, then the nation’s housing equity – the surplus of market value over existing mortgages – shrank by a massive 15% last year, down from £2,890bn to £2,468bn.

Meanwhile, the financial assets of households, such as the value of pension funds and investments, also dropped by 9%, to £3,687bn.

Last year, the stock of consumer credit loans that still had to be repaid – such as credit card debts, hire purchase agreements and bank loans – rose by 5%, to £234bn.

So the effect was that net financial wealth, as opposed to housing wealth, dropped by 10% in 2008 to £3,453bn.

Adding the housing equity of £2,468bn to the net financial wealth of £3,453bn produces a figure for net household wealth of £5,921, down by £815bn or 12% in just one year.

“It is a huge drop to happen in one year,” says Martin Ellis, chief economist at the Halifax.

“But we have had the biggest house price fall yet seen in just one year, combined with a fall in equity prices,” he adds.

In fact, if you think that last year’s house price slump was the 17% fall measured by the Halifax’s own index, then the overall fall in personal wealth amounted to a whopping £1,104bn.

Source: BBC News – http://news.bbc.co.uk/1/hi/business/8241480.stm