Are British households better off than Germany’s?

16th December 2011

The age-old rivalry between the UK and Germany has reared its head on the comment boards this week in response to a UBS article suggesting that the UK is, in fact, wealthier than its Northern European peer. The premise of the article was that the UK has greater asset wealth than Germany and therefore its debt levels look less severe in comparison. The contention was, as might be expected, controversial.

The UK media is in masochistic mood and the UBS report went against the current vogue for self-flagellation:  Witness this hyperbole: "A trillion and a half is such a big a number that most people probably wouldn't even try getting their heads around it. But that is the total level of personal debt owed by the 50 million or so British adults. Per head of population, it qualifies us for the dubious honour of the most indebted nation on earth." 

The UBS analyst argued, controversially, that because much of UK debt was linked to buying homes, it was not the sign of reckless borrowing: "UBS says: "Most UK household debt is mortgage related, and a typical household buys a home to secure a safe future for itself in retirement. Put differently, a homeowning household has protected itself from any mismatch between rental payments and pension income during retirement.

"This can only happen if the household takes on a debt during its working life, so debt levels are high. That characterises UK households as prudent, not reckless. The alternative is a household that may have to depend on the state for housing during retirement."

This matters because high consumer debt levels are routinely given as the reason why the UK cannot grow, yet they may actually be contributing to individual's long-term security: "Mortgages contribute to long term wealth as over time they are paid off and people end up with a house whereas those renting do not and end up poorer. So they're not classing debt as an asset no, and the €375,000 average UK household asset figure is including household debt. The UK far from being the most indebted country in the world is in fact one of the very wealthiest." 

UBS's comments drew rancour: Community commenter, Nexusfast123 said in response to the Telegraph article:

"Putting all of your resources into property is a self-defeating illusion as it diverts investment from other things that are productive – this is in terms of producing products that can be sold overseas and accumulating productive capital like trained people, factories, etc." 

It also drew plenty of anecdotal speculation: pumpernickel on the same site:

"Well, I am staying in Britain at the moment and had a look at property prices in the South East, 50 miles or so outside London. Taking also building quality into account I would say that the relation between UK and German properties outside the big cities is 3 : 1. On an even playing field UK properties would have to lose 66% of their values to be in sync with German properties. My conclusion is that UK properties are artificially over priced in a smart move to give Britons the impression that they are rich." 

And plenty of people quibbled with the stats themselves: lookingforclues, from the Motley Fool said:

"The problem with looking at net assets after a credit bubble is that it will always appear very high. Think about it – there has been a dramatic rise in the demand for assets which have, as a consequence, been continuously bid up. Take property for example which is where a lot of the 'action' has happened. Any time someone comes along with a barrow-load of debt to compete with others who have also been given barrow-loads of debt to buy a house then the price of that house will be forced higher. But the important point is that all comparable houses in the area will also have been magically driven up as the sale acts as a new marker for the market. But only the house that changed hands will have the increase in price netted off with the debt used to buy it. All the other houses can be marked as an increase in asset values with no corresponding debt increase. Voila, up go net assets and we're all that much wealthier."

Equally, arthur_dent, also on the Motley Fool, suggests that the statistics are misleading: "Average incomes and wealth in the US have steadily increased over the last 30 years. Unfortunately for 90% of the population, there have been no net gain in income or wealth. The average is a bit meaningless in this case. For the top 1%, incomes grew 224%, and for the top .1%, incomes grew 390%.

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