The UK is in debt – there is no way of avoiding it. Not only is the country itself in the red but more and more citizens are finding themselves in debt they are unable to clear. It was recently reported that the population of the UK is in £190bn of debt. Here we take a brief look at the current status of household debt across the country.
Mortgages are the largest form of debt
The sharp-eyed among you will have noticed that, while £190bn is a lot of money, it does not represent anything like the total for the amount individuals owe to lenders. That is a chunky £1,508bn — £1.5 trillion — overwhelmingly in the form of mortgages. It is also growing, though at a more sedate 4% rate.
Do these figures suggest a return to the pre-crisis bad old days of binge borrowing? No, or at least not yet. The annual growth of consumer credit has been in double figures since June, a mere five months. In the 1990s and 2000s, it was consistently above 10% from 1994 to the autumn of 2005. In that period, consumer credit growth was often in the mid to high teens, peaking at 17.6%. I would be surprised if that were to happen again.
A small reduction in household debt
As for the overall growth in lending to households, it has been running at its strongest levels since the crisis for much of this year but — driven by the mortgage boom of the pre-crisis era — has grown much faster in the past. Growth in overall lending peaked at more than 15% in 2004. In the 10 years to September 2008, the amount owed by households rose by almost 160% to £1.39 trillion.
This is where it gets interesting. After the crisis, households changed their behaviour, or were forced to do so by cautious banks and other lenders. It took until the autumn of 2013 for household debt, in cash terms, to get back to where it was in September 2008. Mortgages were rationed and consumer credit fell.
That was one reason to be fairly relaxed about household debt. Yes, it was high when the crisis hit, but a five-year period in which it did not grow at all constituted a significant repair. More to the point, debt fell in relation to income.
In both respects, however, that process has come to an end. Since recovering to its previous peak in the autumn of 2013, household debt has risen by more than 8%. It has also started to rise again in relation to income, which is one of the reasons the Bank is concerned.
At its peak, household debt rose to just over 150% of annual household income, dropping to just over 130% in the second half of 2014. Now it is creeping back up again, to 133%. To put that in perspective, 20 years ago debt was less than 90% of income.
For the Bank, both the level of debt and its recent rise are causes of concern. As it put it in its latest financial stability report: “The level of household indebtedness remains high by historical standards. Although average debt servicing ratios remain low, the ability of some households to service their debt could be challenged by a period of higher unemployment. These households could affect broader economic activity by cutting back sharply on expenditure in order to service their debts.”
The latest report from the Bank of England
On the rise in unsecured consumer credit, the Bank notes it stands in sharp contrast to expectations of a weaker outlook for the economy, and that “it raises the prospect of a further rise in household indebtedness as increases in unsecured debt outpace growth in real incomes”.
There are some fascinating snippets in the Bank report. People are borrowing for longer. Roughly 35% of new mortgages are for terms of more than 30 years, rather than the 25 that was the norm. Just over a quarter of new mortgages are for four or more times income, while a fifth are now for 90% or more of the value of the property. The Bank remains convinced, in spite of this, that there has been no slippage in mortgage lending standards.
Some of the rise in debt, it should be said, reflects changes in buying patterns. New car purchases, together with those of many used cars, are now overwhelmingly on finance and, as the Bank says, “growth in dealership car finance has been particularly strong in the past three years”.
But, in the end, the issue of household debt comes down to the question of how well-placed people are to cope with two things that, if not as certain as death and taxes, will happen at some stage. One is a rise in unemployment from current very low levels. The other is a rise in interest rates towards more normal settings.
A meaningful rise in unemployment would double the number of households in serious difficulty, according to the Bank, while many hundreds of thousands would struggle if Bank rate, currently 0.25%, were to rise to 2%, even gradually, and other rates in the economy adjusted accordingly.
With all this going on, you may be asking yourself, “exactly how worried should I be?”. The most disturbing point is that the post-crisis repairing of household finances is now over. However, it is encouraging that there is an end of the rise in debt inflation. One good piece of news that might offer support is that the Office for Budget Responsibility has recently changed its debt prediction, instead of a sharp rise in debt, it now expects a gentle one. If you are concerned about your own debt, reach out to debt charities in your area for advice.