The Wealth Effect
For those in the housing market prior to the boom, things can’t get much better, or at least it seems. As house prices rocket ahead, they feel wealthy. After all, the house they purchased ten years ago for $100,000 is now worth $400,000. That’s a capital gain of $300,000.
The trouble is it’s an unrealised capital gain. It might feel good, but that’s about it. You can’t realise that capital gain until you sell your house, and if you want a primary place of residence to live then you must purchase a house at similarly inflated prices. Like any other market place, you can only realise your gain if you have someone else (‘The greater fool’) wanting to buy it for that.
None the less, this perceived increase in unrealised wealth is called the Wealth effect. It boosts consumer confidence and allows these home owners, as consumers, to use their houses as ATMs to purchase goods and services – lots of them. After all, you have just made $300,000.
3rd August 2004
This spending spree, fueled by high consumer confidence all goes on credit (credit cards/home equity loans) or 72 months interest free and is the cause of our unsustainable double digit credit growth year on year.