Eats green shoots and leaves

The Chris Cook Economics 3.0 column

According to Knight Frank the value of UK residential land for development fell by more than 50% in 2008, and nothing I have seen suggests that the fall is over. Virtually everyone is painfully aware that the prices of UK property – in which land is a major component – have also declined drastically, by 30% or more.

We may take it as read that mortgage debt remains pretty much the same as before the land price collapse, however, and the result is that the ratio of debt to equity in Joe Public’s semi-detached has drastically increased. I don’t have the figures for this in the UK, but an interesting article by Niels C Jensen quoted on Credit Writedown has sobering data in respect of the US:

“Whereas debt-to-equity in the US housing market was 48% as recently as in December 2006, it is now 70% and will rise to 80% once house prices have mean-reverted”.

As he said:

“Wealth is extremely skewed ……..almost 34% of all wealth in the US is held by the wealthiest 1% of the US population”.

But it gets worse, because not everyone has a mortgage. In the UK at least, over £1 trillion in property is held free of mortgage by people over 65.

As for the US:

“Almost one-third of all US households have no mortgage. If you adjust for that, the 70-80% debt-to-equity ratio suddenly becomes a major challenge because it means that the two-thirds who do have a mortgage already face a debt-to-equity ratio in excess of 100%. Even worse, once the mean reversion has run its course, two-thirds of US households will be facing a debt-to-equity ratio of 120-125% on average”.

His conclusion?

“US consumers are broke. That is a shocking number and it blows a huge hole through the heart of the green shoots campaign so valiantly promoted by most of the mainstream media in recent weeks. The poorest two-thirds of US households are effectively broke, whether they realise it or not”.

Jensen’s argument re the US applies to the UK as well, if maybe not quite as starkly: UK consumers are broke.

Green Shoots? I don’t think so. Green Leaves.