Sunday, December 04, 2016
Britain's households are swimming but not drowning in debt - yet
Posted by David Smith at 09:00 AM
Category: David Smith's other articles


My regular column is available to subscribers on This is an excerpt.

Household debt is back in the headlines. Official figures show that consumer credit is rising by 10.5% a year, its fastest since well before the crisis, while the Bank of England has warned that the debt being accumulated by households is one of the risks it sees to financial stability, among several others.

How worried should we be about this household debt build-up, which is running in parallel to the rise in government debt described here last week?

Let me start with some numbers. Consumer credit, as noted, was up by 10.5% in the 12 months to October, it fastest rate since October 2005. Consumer borrowing, on this measure, hit a total of £190.1bn. Of the latest 12-month rise, there was an increase of 9% in credit card borrowing and 11.4% in other loans and advances.

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 that individuals owe to lenders. That total is a chunky £1,508bn - £1.5 trillion – overwhelmingly in the form of mortgages. It is also growing, though at more sedate 4% a year.

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.

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 – grew 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. Mortgage rationing and falling consumer credit played a big part in this.

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 why 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 and the recent rise in debt 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 rations 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.”

On the recent rise in unsecured consumer credit, the Bank notes that it stands on sharp contrast to expectations of a 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 longer. Roughly 35% of new mortgages are for terms of more than 30 years, rather than the 25 that used to be 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 people are placed to cope with two things which, 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.

So how worried should we be? The fact that the post-crisis repairing of household finances has come to an end is a little disturbing, though the rise in debt in relation to income has so far been modest. The Office for Budget Responsibility (OBR), which until now had predicted a sharp rise in debt, said a few days ago that it now thinks the process will be a gentle one. Using a slightly different, and larger, measure to that used by the Bank, it sees a rise in debt from 142% of income now to 149% by 2022.

The key question is whether the recent strength of credit growth reflects a determination by households to borrow their way out of trouble – or into it – or whether it will slow as household incomes are squeezed and the job market softens. The GfK index of consumer confidence took a sizeable five-point drop last month as people began to fret about the economic outlook, and adopt a more downbeat attitude towards major purchases.

That should signal a more cautious attitude towards greater indebtedness, though perhaps not until after Christmas. The experience before the crisis, however, was that once people get the debt bit between their teeth, they are reluctant to let go. It is easy to see excessive debt as somebody else’s problem. So we should keep a close eye on the credit and debt numbers.