Monday, 11 January 2016

"UK house price to crash as global asset prices unravel"

Via Home Buyers' Strike, from The Telegraph.

The article is full of statistics on credit volume, the oil price, share prices etc and other relevant background.

Surprisingly well-informed by Telegraph standards, but they let themselves down with this:

"The stock market collapse will also destroy wealth."

Share prices, like land prices, are not really wealth at all, and they are certainly not net wealth.

A share costs $100 - what does that mean? It means that somebody has paid somebody else $100 for it recently. The seller's net wealth is unchanged and the buyer still owns exactly the same thing, a smaller percentage of a company. Nine times out of ten, the fall in value of the shares is not because the company's prospects have got worse, it is to do with other factors. So no change in overall wealth.

In the one time out of ten where the share price has fallen because the company's prospects have worsened, then that fall will be included as part of overall GDP changes, and it is enough to measure that. If you add on the fall in imaginary wealth (like share prices) then you are double counting.


Lola said...

Indeedy. The price of a share is the buyers calculation of the discounted cash flow of the future income stream. He is happy to buy at £x for a yield of say 3%. When (if) the share price 'crashes' the underlying business often continues to pay dividends at the same cash rate, so the yield rises to say 5%. The buyer is still getting his money's worth.

The problem comes about when every speculates on capital gain, most driven by those bad government policies discussed earlier, which also has the effect of encouraging too many people to hold too many stocks.

Mark Wadsworth said...

L, yes, creating the illusion of wealth while skimming rents etc, that is what the current lot is about.