It is time to put Student Loans back in the UK debt numbers

This morning has seen some updated statistics for the amount of debt in the UK released by The Money Charity. In it was something to grab the headlines as this from the BBC shows.

Household debts have spiralled to a whopping £1.5tn in the UK for the first time, new statistics show.

If we go to The Money Charity itself we are told this and apologies for their enthusiasm for capitals.

PEOPLE IN THE UK OWED £1.503 TRILLION AT THE END OF SEPTEMBER 2016. THIS IS UP FROM £1.451 TRILLION AT THE END OF SEPTEMBER 2015 – AN EXTRA £1036.58 PER UK ADULT.

So we cross a threshold and indeed are given a troubling view of the future.

ACCORDING TO THE OFFICE FOR BUDGET RESPONSIBILITY’S JULY 2015 FORECAST, HOUSEHOLD DEBT IS PREDICTED TO REACH£2.551 TRILLION IN Q1 2021.

So debt has risen and is forecast to continue doing so at what must be a faster rate than we have seen. I will look at the position in a moment but we cannot move on without pointing out that the OBR ( Office of Budget Responsibility) forecasts lots of things but even so does not get many right!

Bringing this to a household and individual level

The Money Charity presents us figures for debt per UK household.

THE AVERAGE TOTAL DEBT PER HOUSEHOLD – INCLUDING MORTGAGES – WAS £55,683 IN SEPTEMBER. THE REVISED FIGURE FOR AUGUST WAS £55,523.

And also per person.

PER ADULT IN THE UK THAT’S AN AVERAGE DEBT OF £29,770 IN SEPTEMBER – AROUND 113.7% OF AVERAGE EARNINGS. THIS IS SLIGHTLY UP FROM A REVISED £29,685 A MONTH EARLIER.

It is interesting to see the numbers compared to average earnings but care is needed. A better comparison would be with net or post-tax earnings and even with that there is the issue that as a minimum one has to eat to survive and pay other essential bills.

What does this cost in terms of interest?

Lets take a look at what we are told.

BASED ON SEPTEMBER 2016 TRENDS, THE UK’S TOTAL INTEREST REPAYMENTS ON PERSONAL DEBT OVER A 12 MONTH PERIOD WOULD HAVE BEEN£51.135 BILLION.

If we look at this overall we see that such a number comes from us living in an era of relatively low interest-rates although the 3.4% to 3.5% is nothing like the near zero interest-rate policy that has been applied to UK government debt.  I will break the numbers down in a moment but for now here are some daily and per household numbers.

  • THAT’S AN AVERAGE OF £140 MILLION PER DAY.
  • THIS MEANS THAT HOUSEHOLDS IN THE UK WOULD HAVE PAID AN AVERAGE OF £1,894 IN ANNUAL INTEREST REPAYMENTS. PER PERSON THAT’S £1,013 3.87% OF AVERAGE EARNINGS.

What are the interest-rates paid?

We discover that the vast amount of the debt must be secured or mortgage debt otherwise the interest-rate would not be possible. From the Bank of England.

The effective rate on the stock of outstanding secured loans (mortgages) decreased by 10bps to 2.74% in September and the new secured loans rate fell to 2.27%, a decrease of 4bps on the month. The rate on outstanding other loans decreased by 2bps to 6.76% in September and the new other loans rate decreased by 37bps to 6.65%

The fact that the numbers are decreasing will lower the monthly burden per unit of debt and no doubt would have the Bank of England slapping itself on the back.  However its effective interest-rates series somehow misses what is happening in the world of credit cards and overdrafts so let me help out from its underlying database.

The credit card interest-rate it calculates was 17.94% in October. This is a lot more awkward as you see it was around 15% as we hit the peak of the last boom in the summer of 2007. If we move to the overdraft interest-rate it calculates it was 19.7% October and if we make the same comparison with the summer of 2007 it was around 17.7% or 2% lower back then. Perhaps the soon to be closed staff accounts at the Bank of England have had quite different interest-rates and it occurred to no-one that the wider population was seeing higher as opposed to the officially claimed lower interest-rates. Of course there is an issue of bad debts here but interest-rates of 17.94% and 19.7% when Bank Rate is 0.25% seem to raise the spectre of that of fashioned word usury.

Where is the debt?

Most of it is mortgage debt but as I pointed out last Monday unsecured debt is growing quickly.

OUTSTANDING CONSUMER CREDIT LENDING WAS £188.7 BILLIONAT THE END OF SEPTEMBER 2016.

  • THIS IS UP FROM £176.3 BILLION AT THE END OF SEPTEMBER 2015, AND IS AN INCREASE OF £247.10 FOR EVERY ADULT IN THE UK.

This means that the situation is currently as shown below.

Consumer credit increased by £1.4 billion in September, compared to an average monthly increase of £1.6 billion over the previous six months. The three-month annualised and twelve-month growth rates were 9.6% and 10.3% respectively.

This means the following on a household level.

PER HOUSEHOLD, THAT’S AN AVERAGE CONSUMER CREDIT DEBT OF £6,991 IN SEPTEMBER, UP FROM A REVISED £6,963 IN AUGUST – AND  £462.19 EXTRA PER HOUSEHOLD OVER THE YEAR.

Also just under a third of this is one of the most expensive forms which is credit card debt.

Time for some perspective

Let us take Kylie’s advice and step back in time for some perspective. I have chosen to go back to September 2007 as it was then as Northern Rock went cap in hand to the Bank of England that warning lights of “trouble,trouble,trouble” were flashing.

Total UK personal debt at the end of September 2007 stood at £1,380bn. The growth rate increased to 10.0% for the previous 12 months which equates to an increase of £120bn. Total secured lending on homes at the end of September 2007 stood at £1,163bn. This has increased 10.9% in the last 12 months. Total consumer credit lending to individuals in September 2007 was £217bn. This has increased 5.8% in the last 12 months.

Back then they were much less keen on using capitals! Also I note that unsecured debt was growing much more slowly then.although it was in total more than now.

Now the theme that we cut our lending in this area has a problem. Let mt take you to a 2012 paper on the subject from the Bank of England.

The stock of student loans has doubled over the five years to 5 April 2012 to £47 billion, and now represents more than 20% of the stock of overall consumer credit. With student loans unlikely to be affected by the same factors that influence the other components of consumer credit, the Bank is proposing a new measure of consumer credit that excludes student loans

Consumer credit fell from £207 billion in June 2012 to £156 billion in August. Problem solved at a stroke…oh hang on!

So yes we cut consumer credit but not as much as the unwary might think.

Student Loans

Sadly we do not have a UK series but here are the numbers for England as they are much the largest component.

The balance outstanding (including loans not yet due for repayment) at the end of the financial year 2015-16 was £76.3 billion, an increase of 18% when compared with 2014-15.

The total is growing fairly quickly as indeed we would have expected.

The amount lent in financial year 2015-16 was £11.8 billion, an increase of 11% when compared with 2014-15.

Thus if they went back into the consumer credit numbers we would see a rather different picture.

Comment

So on today’s journey we have reminded ourselves that the comforting official view on UK household and in particular unsecured credit has been strongly influenced by the removal of student loans from it in the summer of 2012. Otherwise today’s headline would be household debts are now circa £1.6 trillion. A bit like the situation with the official consumer inflation measure where the fastest growing sector of owner occupied housing costs somehow got omitted. The UK establishment has been meaning to put it back for over a decade now!

Meanwhile what to measure this against poses its own problems. Some would argue that a higher value for the housing stock via higher house prices makes the mortgage lending even more secure. The catch of course is that the house prices depend on the lending which the Bank of England fired up with its Funding for Lending Scheme in the summer of 2013. If we move to real incomes then in spite of recent growth it is hard to be reassured as according to the official figures we are still 4% below the summer of 2007.

Meanwhile something troubling for the Bank of England nirvana of higher mortgage debt and house prices emerged over the weekend.

A large house price depreciation can be good for economic growth, research finds ( World Economic Forum)

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21 thoughts on “It is time to put Student Loans back in the UK debt numbers

  1. UK policy is that banks have to be supported at the expense of….well, everything else, but in particular the borrower UK populace.
    The correct response was surely that there should have been limits on new mortgage borrowing via multiples of income, whilst reducing the interest rates on existing mortgage borrowing considerably more than occurred. This would have allowed free income to be released into the economy, or preferably saved, provided a decent savings vehicle was created.

    • Hi Mickc
      There was another feature of the Bank of England interest-rate series which is that new savings deposits are getting 1% per annum. Not much but a fair way above the 0.25% Bank Rate they can get via the Term Funding Scheme. Only £1.38 billion has been tapped from the TFS meaning for now banks seem to be afraid of pushing rates nearer to 0%.

  2. Higher house prices, higher mortgages, funding for lending, ultra low interest rates, low salary growth higher secured debt, higher unsecured debt – there is a connection there somewhere if only I could work it out!

    P.S agree student loans should be included. Debt is debt. You can’t cherry pick what is included.

    • Hi Pavlaki

      The only awkward bit is that Student Debt needs its own category on two grounds. Firstly it has some security ( student futures) but in some ways running against it is the fact that we expect a fair proportion never to be repaid.

  3. Hi Shaun, your highlight of the student debt does beg some quetions of me. The 47bn versus the 76bn. I appears an excellent ruse for future credit growth, we need these products on the shelves of bank stores right now!

    Imagine, Govt backed loans… have your £10k now but dont’t pay any thing for a while, until the repayment series is triggered. Already indebted can take on much more financial product without affecting immediate disposable income.

    Paul C.

    • Hi Paul C

      Yes what could go wrong with inflating the amount of Student Debt whilst excluding it from the household debt headline series? Whilst there is as you say a repayment series there seems to be quite a bit of it that will never be repaid. No wonder the establishment wants inflation.

  4. Shaun, apologies that this has nothing to do with the topic above but I do want to highlight the Brexit con that is happening where companies using it as an excuse to increase prices. Walkers are the latest with a 10% increase blamed on brexit. This is utter rubbish! I worked for many years in the food industry and there is simply no way that their costs have increased by 10%. The potatoes, rapeseed oil are all UK sourced. Overhead costs including labour are obviously UK based. These are the major costs of manufacture by a long way. I currently help a small company that uses a lot of cardboard boxes (but a million times less than Walkers) and there is no increase there. Only the foil pack remains and this is a tiny part of their production cost and as it might be imported, as might flavorings, there could be a cost increase there. Having said that there are plenty of UK suppliers so not necessarily so. Brexit can only be blamed for a very small cost increase – if indeed any has occurred.
    I expected this to happen but it does annoy me that Brexit is trotted out as an excuse to gouge the consumer. We have had pack shrinkage for a number of years, which is a quiet price increase and seldom picked up by the consumer. Now they have the perfect excuse. Expect more to follow.
    Rant over!

    • Hi Pavlaki

      I agree and this from Walkers via the Guardian looks weak at best to me.

      “A Walkers spokesperson said: “Whilst our potatoes are British, we import a number of different ingredients and materials to produce a finished packet of Walkers crisps such as seasonings, oil for frying and key raw materials used in our packaging film.

      “Fluctuating foreign exchange rates, supply pressure on key ingredients and the weakened value of the pound are impacting the import cost of some of our materials and affecting the price of material costs based on commodities that are traded in foreign currencies.””

        • I doubt if there is even as much as1 potato in a packet of crisps. The profit margin must be huge. I have always thought that the person who invented them must have been laughing all the way to the bank!

  5. Hi Shaun
    Does credit card debt include everything put on a card , even if the balance is paid in full , ie no interest charged? I ask because its increasingly easier for people to use cards this way rather than cash. Not really ‘debt’ , more delayed payment plus convenience.
    Of course if cash was ‘outlawed’ there would be nothing to stop banks charging for this ‘convenience’.

      • If it was only possible to transfer from a consumer account to a UK regulated bank account and that transfer was put in suspense for 5 working days it should prevent a lot of fraud. If the banks were financially responsible for knowing who their customers actually are that would stop a lot more.

    • Hi JW

      The definition page is not that helpful.

      “Consumer credit (excluding student loans) is defined as borrowing by UK individuals to finance current expenditure on goods and/or services excluding loans issued by the Student Loans Company. Consumer credit (excluding student loans) is split into two components; credit card lending and ‘other’ lending (mainly overdrafts and other loans/advances). Charge card lending can sometimes be indistinguishable from credit card lending; in these cases it is included in data for credit card lending. ”

      I think that what is transaction lending must be excluded or the numbers would be a fair bit higher…

  6. Hi Shaun
    Maybe some bright spark will
    suggest turning some of the existing
    student loans into CDO’s selling them to
    god knows who diverting the debt leading
    to a glorious increase to our GDP, deja
    vue 2008!

    JRH Tongue in cheek!

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