By Ian Pollock
Personal finance reporter, BBC News
Falling house prices produced the biggest fall in wealth
The international credit crunch, and the subsequent recession, brought the banking industry to the edge of catastrophe and led directly to pay cuts, redundancies and rapidly-rising unemployment throughout the UK.
For those who have lost their jobs, and possibly their homes, the effects on their personal finances have been all too obvious.
But there has been a wider effect on the accumulated personal wealth of the nation.
The BBC can reveal that in the course of 2008 alone, £815bn was knocked off the wealth of households in the UK.
That amounted to an average of nearly £31,000 for every household in the UK.
The huge dent to personal wealth last year has been calculated, for the first time, by the Halifax bank, exclusively for the BBC.
The biggest impact was from the sudden slump in house prices which led, according to government figures, to a 9% cut in the market value of all residential property, from £4,077bn to £3,693bn.
Taking into account the effect of a 3% rise in the value of the mortgage debts held by home buyers, to £1,225bn, then the nation's housing equity - the surplus of market value over existing mortgages - shrank by a massive 15% last year, down from £2,890bn to £2,468bn.
Meanwhile, the financial assets of households, such as the value of pension funds and investments, also dropped by 9%, to £3,687bn.
Last year, the stock of consumer credit loans that still had to be repaid - such as credit card debts, hire purchase agreements and bank loans - rose by 5%, to £234bn.
So the effect was that net financial wealth, as opposed to housing wealth, dropped by 10% in 2008 to £3,453bn.
Adding the housing equity of £2,468bn to the net financial wealth of £3,453bn produces a figure for net household wealth of £5,921bn, down by £815bn or 12% in just one year.
"It is a huge drop to happen in one year," says Martin Ellis, chief economist at the Halifax.
"But we have had the biggest house price fall yet seen in just one year, combined with a fall in equity prices," he adds.
In fact, if you think that last year's house price slump was the 17% fall measured by the Halifax's own index, then the overall fall in personal wealth amounted to a whopping £1,104bn.
- £1.5 trillion was spent on the bail-out in the UK
- £650bn on guarantees to the banks against losses
- £400bn on purchase of assets and lending by the Treasury
- £200bn on cash support (liquidity) to prevent banks running out of money
- £185bn was spent on the special liquidity scheme
- £56bn on RBS and Lloyds/HBOS
- £48bn on Northern Rock and Bradford & Bingley
- However, if the banks don’t go bust and the economy recovers, the taxpayers should get their money back
- By 2014 the national debt is predicted to rise to £1.37 trillion
- The government is likely to have to pay annual interest of £60bn, the equivalent of the whole education budget
- In 2007/08 people in the UK lost £422bn on the value of their house and £393bn of their savings, pensions and investments.
- The total loss of personal wealth was equivalent to £31,000 per household
Houses and shares
The idea that a big fall in house prices would depress personal wealth is not very surprising.
People still saved more last year, despite the Northern Rock crisis
Two-thirds of households in the UK own or are buying their own homes.
And 8% also own a property other than their own home, according to the most recent figures from the Office for National Statistics (ONS).
But the other big dent in wealth has come from the fall in share prices.
In the UK, they had reached near-record levels by the autumn of 2007, but they wobbled with the onset of the credit crunch.
The bankruptcy of Lehman Brothers a year later, with the subsequent crisis of confidence throughout the world financial system, then triggered a massive slump in share values.
The 100 share index fell from 6,457 at the end of December 2007 to 4,434 at the end of December 2008 - a drop of 31%.
What did that mean for the wealth invested in the stock market?
Well, according to figures from FTSE International, the total value of shares in the 100 share index fell during 2008 from £1,5310bn to just £1,083bn, a decline of 29%.
And the value of the shares in the wider FTSE All-share index dropped by 32%, from £1,818bn to £1,239bn.
Of course, only a small minority of shares on the UK stock market are owned directly by individuals in personal portfolios.
In 2006, UK individuals directly owned just 13% of the UK stock market.
Most of the rest was - and still is - owned by big investment organisations such as pension funds, insurance companies and other professional investment outfits, such as hedge funds.
But the fall of share values, both here and abroad, undoubtedly made a big contribution to falling personal wealth, as those shares are largely owned on behalf of members of the public for the benefit of either their pension funds or life insurance policies.
In 2007, according to the ONS, more than half of households' financial wealth (as opposed to their housing wealth) was made up of their pension funds and life assurance funds such as those paying for endowment policies.
They amounted in turn to 29% of households' total net worth.
In 2007, the value of household assets in pension funds and life assurance policies was £2,200bn - equivalent to 156% of the annual output of the economy.
How did the fall in share values affect pension funds?
According to pension consultants Aon, the value of defined contribution (money purchase) pension funds in the UK - schemes funded by employers, private pension funds and stakeholder schemes - fell from £546bn in December 2007 to £433bn a year later.
Helen Dowsey of Aon said that in her experience, DC scheme members with a long time to go to retirement had often been relaxed about the fall in their funds' values.
"Many DC members have not been as upset as one might expect," she said.
"They often realise that as the funds are heavily invested in shares, they have gone down and may go up again."
"But some people with only a short time to retirement have had to defer their plans and work longer to make up the shortfall," she pointed out.
What about final-salary schemes in the private sector?
Typically these funds are heavily invested in government and corporate bonds, and commercial property (which has slumped in value in the past 18 months or so), but are still heavily reliant on shares, both here and abroad.
The share slump contributed to their assets falling in value from £886bn in December 2007 to £789bn in December 2008, according to the Pension Protection Fund (PPF).
Partly as a result of this, the fundamental position of the schemes has worsened dramatically and the 7,400 such schemes monitored by the PPF currently have a collective deficit of £173bn.
Employers with final-salary schemes provide a guarantee of the eventual payout, so long as an employer remains solvent.
The wealth lost in 2008 was equivalent to nearly 42,000 tonnes of gold
But there is no doubt that the security of the funds that will provide pensions for millions of workers has been undermined.
Not all forms of wealth have been damaged in the past two years.
About 70% of British adults have some form of savings or investments, according to the ONS.
And 54% have deposit accounts and 34% have money saved in the popular tax-free Individual Savings Accounts (ISAs).
These stores of wealth were largely unaffected by the recession last year.
The value of ISAs, both in cash and shares, rose from £208bn in 2007 to £220bn in 2008, mainly reflecting additional sums put away by savers.
And the money held in savings accounts with banks, building societies and at National Savings rose by £52bn to £1,102bn.
The recent revelation that people in the UK have now started to pay off their personal debts, instead of expanding them rapidly, means that some wealth is now being accumulated again.
That is partly because some homeowners, benefiting from low interest rates, have chosen to use their spare cash to repay their mortgages faster and to pay off other debts, such as credit card bills.
A deficit in a pension scheme is a serious cause for concern, and the increased closure of schemes undoubtedly means a permanent dent to people's wealth.
What about lower house prices?
"Most people shouldn't worry if their house prices fall," says Martin Ellis.
Most home owners live in their homes and have no need to cash them in for money unless they are planning to move abroad, or are downsizing to either a smaller home or one in a cheaper part of the country.
Meanwhile, most people are still in jobs and average earnings across the whole economy are still rising, if only just.
When the recession is over and the economy starts growing again, we may even repeat the experience of early 1990s.
Research carried out earlier this year by Lindsey Macmillan, an economist at Bristol University, threw up a remarkable fact.
Between 1991 and 1993, as the economy crawled out of recession, more than half of UK households saw their earnings rise, and one in six of them saw their incomes increase by more than 50%.
This year, share prices in the UK have shot up by about 40%, and house prices have started to go up again.
So if house prices and share prices continue reviving in the coming years, the nation's paper wealth should expand once more, and many of us will never notice that anything much had changed in the first place.