The issue of debt and what to do about it was of course one of the causes of the credit crunch and has been debated constantly during it. Today as it is often misrepresented I wish to look at household debt in the UK. But before I turn to it the national debt of the United States passed another threshold on Monday so let us doff our caps to the US $19 trillion threshold and move on. Oh and in case you were wondering about the debt ceiling it has been suspended until March next year which if you consider the chaos it created for no particular sustained gain that is probably the for the best.
UK Household debt
There has been some rather chilling research on this subject released this morning so let’s get straight to it. From City-AM.
The average Brit will not pay off unsecured debt, like credit cards and certain loans, until they are 64, a survey by the Centre for Economics & Business Research (Cebr) for peer-to-peer lender Zopa found.
That rises to 69 once mortgages are included.
Well at least they are being sensible and paying off the most expensive debt first! Actually if you read it again that is not what it is saying. So it is not only the younger generation who are facing a lifetime of debt singing along to LunchMoney Lewis.
I got Bills I gotta pay
So I’m gonn’ work, work, work every day
I got mouths I gotta feed
So I’m gonn’ make sure everybody eats
I got Bills
Perhaps the prospect of all this is behind this reported by the Office for National Statistics yesterday.
Ratings of life satisfaction and happiness were at their lowest, on average, for those aged 45 to 59.
On current trends they may well have to raise the ages named here.
those aged 65 to 79 tended to report the highest average levels of personal well-being
Actually for Londoners like me there may well be quite a different set of age bands.
Londoners may have to wait until they reach 77 to live debt-free, according to new research…….Londoners are saddled the longest as they typically take on more unsecured debt and secure mortgages later, despite their higher wages.
Those of you who live in the North-East can have a laugh at our expenses as you pass the threshold at 57. In fact you are the only group of people who have expectations that approach reality.
The survey also found a big gap in expectations: Britons expect to start a debt-free life when they hit 57 – 12 years earlier than they are likely to.
I am not sure if it is a good thing or a bad think that the younger generation are the most out with their view of their future.
Those aged 16 to 24 are the most optimistic – they expect to be rid of unsecured debt at just 38.
That also makes them wildly wrong: if they buy a home with a mortgage they’ll be waiting until age 74.
There are obvious caveats in such research but it does highlight existing trends.
A space oddity
There is an institutional problem in having debts at ever later ages in the UK and it has been given the oxygen of publicity this week too. From BT.com.
Peter Day wanted to extend his mortgage in order to pay for his daughter’s wedding. At the time he was 59 and close to paying off his mortgage, but asked to extend his term by five years.
However, despite having three final salary pensions ready to cover him in retirement, he was turned down for the mortgage extension by Co-operative Bank.
For foreign readers UK mortgage providers have long had rules that say that you have to have a provable income to repay it which poses problems at retirement so the state retirement age of 65 was a potential issue as was 60 for those who were lucky enough to have a pension from then. It would seem that much of the financial sector has not kept up with the times. Who da thunk it? As Turkish pointed out in the film Snatch.
That by the way is the same financial sector who requires very highly paid staff because they have such valuable skills and abilities.
The research quotes these numbers.
The average British debt per household was £53,904 in December including mortgages, according to the Money Charity.
That works out at £28,891 per adult, which is 112 per cent of average earnings.
Based on December’s figures, Brits each spend an average of £1,037 on interest repayments every year –four per cent of a typical salary.
The debt figure quoted is in fact including mortgages and if you want a total it comes to this.
PEOPLE IN THE UK OWED £1.455 TRILLION AT THE END OF DECEMBER 2015. THIS IS UP FROM £1.424 TRILLION AT THE END OF DECEMBER 2014 – AN EXTRA £627.09 PER UK ADULT.
Apologies for the capitals and the estimated cost of this is shown below.
BASED ON DECEMBER 2015 TRENDS, THE UK’S TOTAL INTEREST REPAYMENTS ON PERSONAL DEBT OVER A 12 MONTH PERIOD WOULD HAVE BEEN£52.371 BILLION.
The official denial
We know how to treat these and at Davos Mark Carney gave us one and the Financial Times joined it as it prepared for the first question at the next Bank of England press conference.
But household consumption has grown slower than the economy since the recovery started and the appetite for debt has fallen sharply. Households have increased their outstanding debts £5.1bn on average every quarter since 2009, nearly four times less than the £22bn rate between 1997 and 2009.
These numbers are no doubt true but miss some important points. If you argue that the amount of debt was an issue pre credit crunch then the fact it has risen since poses a question. Also yes household consumption and debt have slowed over the time period quoted but more recently they have picked up. For example retail sales were very strong in 2015 and the December lending data told us this.
The three-month annualised and twelve-month growth rates were 4.0% and 3.3% respectively.
So the economy is growing at around 2% per annum but we have no inflation so debt has risen relatively here. Also there is an important sectoral shift which matters as some groups are piling up debt as others repay creating quite different groups. This is highlighted by the mortgage data.
Gross lending secured on dwellings was £19.5 billion and repayments were £16.0 billion.
Also unsecured credit is on something of a tear.
Consumer credit increased by £1.2 billion in December, compared to the average monthly increase of £1.3 billion over the previous six months. The three-month annualised and twelve-month growth rates were 9.1% and 8.6% respectively.
The acceleration which began in late summer 2014 continues.
The Financial Times also made the point that if you look at debt you need to look at assets and here is its view.
Official figures show that after deducting debt, net household assets stood at 7.67 times income in 2014, a stronger financial position than at any point in almost 100 years.
The point is valid but of course it is using a marginal price and I would argue an inflated one for house prices which are the biggest asset by far. As Feeling QEzy points out in the comments what could go wrong?
For example UK housing stock annual turnover is circa 4% while 30% of homes have a mortgage, and as we all know it is the marginal seller that drives the price in a weak market.
Whilst I am no fan of the projections of the Office for Budget Responsibility they do pose a question as they project rises in household debt although typically they have changed it in 2021 to 163% of income from 172%. That shows a danger in this sort of analysis.
So where do we stand? Not quite in the quicksand that some argue. But we are seeing rises in unsecured debt again and you do not have to take my word for this just check the absence of the phrase “household debt levels are falling” in recent Bank of England speeches. This poses a problem as for a start how can they raise interest-rates in such an environment? Also if you are wondering what is the big deal here the US National Bureau of Economic Research takes up the story.
In a study summarized in the January edition of The NBER Digest, researchers find that a rise in household debt relative to a nations GDP is often associated with a subsequent economic contraction, and that this debt ratio increased in many countries prior to the decline in global GDP growth in 2007-12.
Oh and the area which is supposed to be benefiting from Bank of England policy smaller businesses how is that going?
Net lending to SMEs was £0.0 billion ( in December 2015)