Wed, 16 May 07
The property boom of the last 10 years has led to a dangerous over-reliance on property, a major think-tank has warned...
Recent Datamonitor research has shown that 55 percent of national wealth is held in property, compared to the 58 percent held in financial vehicles and other investments in 1996.
The figure is forecast to rise to 60 percent by 2009. Across the south east of England the average adult has 210,077 pounds ‘saved' in the form of property equity.
Economist Martin Weale, director of the National Institute of Economic and Social Research, said that property equity was ‘crowding out' other forms of saving.
While capital accumulated by the older generation is increasingly tied up in bricks and mortar, mortgage payments by younger homeowners are weakening consumer spending.
"People are not taxed on owner-occupied property so this acts to stop them from taking advantage of other asset classes," said Weale.
Selective tax needed
In a recent article for the institute's journal he warned that the drain of property spending on income was equivalent to a government current account deficit running at 4 percent of GDP
While restructuring property taxes to encourage diversification was politically unlikely, he said that a selective tax on some forms of consumer credit could have the same effect.
David Stubbs, senior economist at the Royal Institution of Chartered Surveyors agreed that a tax on some forms of credit would be the only way to curb global asset liquidity.
Controlling inflation through interest rates ‘flawed’
He added that a current global consensus on controlling inflation through the narrow prism of interest rates could come to be seen to be flawed in the future.
"In most major economies, asset prices have increased exponentially since 1997," said Stubbs.
"While this has massively increased wealth, it has also had huge socio-economic effects, chiefly on affordability and equality - most of them bad."
Rumours that Chancellor Gordon Brown would attempt to curb price growth with a prioritised home building scheme may not be enough, he added, pointing out that inflation had continued alongside massive home building schemes in the US, Spain and Australia.
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