Imagine a family living in the UK, an ordinary middle class family. We will call them the McHughs. The father has a management position, and earns £50,000 per year. The mother has a good job in a local hotel where she is the marketing manager and earns £30,000 per year. They therefore have an income of £80,000 a year. They have two children at the local school.
The McHughs have purchased a home, which cost them £400,000, which is five times their combined income, using a 95% mortgage. The house has increased in value by £30,000 a year, in each of the three years since they purchased it. They are very pleased to see their house growing in value, as it is like having another earner in the house, except this earner pays virtually no tax on the income, making it an even better earner than themselves.
The McHughs have a relatively large mortgage, but interest rates are low. Despite this, they struggle to balance the quality of life that they enjoy against their income. As such, they make use of credit cards occasionally. Each year, for three years, they have added £7000 to the family debts through overspending on the ‘little luxuries’ in life, such as holidays, a new kitchen for the house. At the end of the second year in the house, Mr. McHugh decided that he would fulfil a dream of owning a Mercedes, and re-mortgaged the house to realise £20,000 of the increase in value of this asset. He used this as the down payment on the car, and took a loan for £20,000 to pay for the remainder.
Overall, the McHughs non-mortgage debt stands at £21,000 for the credit cards, and £15,000 remains of the loan for the car. They are starting to find the payments on these debts are stretching them, and they seem to be using the credit cards a bit more often than before.
Next door to the McHughs live the Jones family. The Jones family know and respect their neighbours. They can see how successful they are. They are always doing something to the house, making improvements, and they seem to be living the good life. Only recently the McHughs bought a new Mercedes and Mr. Jones feels a little jealous, as he would love a Mercedes too.
The Jones family, have less income than the McHughs, but every year they save a few thousand pounds. They have no debt except for their mortgage, and only spend what they earn. They purchased their house at the same time as the McHughs, and are steadily paying their mortgage. Their belts are tight, but they get by, and look forward to better days ahead.
Which of these two families is the more wealthy family?
The answer largely depends on whether you are an economist who has been a cheerleader for the boom of the last ten years, or whether you are a person grounded in the real world. The McHughs have been the motor of growth in the Anglo-Saxon economies. Apparently we have gone through a period of sustained growth and, in moments of hubris (Gordon Brown in the UK being a wonderful example), we promote the ‘success’ of the Western economies to the rest of the world. The trouble arises when we ask a simple question; ‘Where is this growth?
