Years of savings would be needed to return household wealth to pre-recession levels, a Bank of England report has found.

According to the figures, it would take nine years for households that saved 10% of their income to bring wealth back up to the average of the last 20 years. However, the Bank said that it is difficult to assess how much, if at all, households will put aside in savings in order to rebuild their wealth.

The report found that between 1995 and 2007 the ratio of household spending to saving fell to historical low levels. Rising property prices, falling interest rates and easy access to credit meant that people were tempted to spend rather than save during the late 90s and early part of this decade.

However, the credit crunch and recession has reversed many of these trends, as well as bringing higher rates of unemployment. Some may also fear future tax rises, the Bank suggested.

“Households may respond by increasing their precautionary saving,” the report said. “All of these effects are, however, highly uncertain. History does not provide a clear guide.”
However, paradoxically, by reigning in spending average household income could decrease.

“Any attempt to reduce consumption is likely to push down on output and hence household incomes. That could actually make it harder for households to increase their saving - an effect know as the paradox of thrift,” said the report.

A recent study found that the recession could have been responsible for an average £31,000 drop in household income last year, as the gathering economic crisis undermined house prices and stock market investments.

This entry was posted on Tuesday, September 22nd, 2009 at 10:41 am and is filed under Banking, Budgeting, Savings. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.