The more we are told UK household debt is not a problem the more worried we should be

We have reached a stage where the UK establishment is paying more and more attention to household debt issues. This reminds me of the explanation of the bureaucratic response to such issues explained by Yes Prime Minister. All we have to do is switch from foreign to economic policy. From

Sir Humphrey Appleby: Then we follow the four-stage strategy.

Bernard Woolley: What’s that?

Sir Richard Wharton: Standard Foreign Office response in a time of crisis.

Sir Richard Wharton: In stage one we say nothing is going to happen.

Sir Humphrey Appleby: Stage two, we say something may be about to happen, but we should do nothing about it.

Sir Richard Wharton: In stage three, we say that maybe we should do something about it, but there’s nothing we *can* do.

Sir Humphrey Appleby: Stage four, we say maybe there was something we could have done, but it’s too late now.

The other part of the strategy or game is to make it appear that you are on the case which these days in monetary or economic policy is summed up by the use of the word vigilant which seems set to become a metaphor for anything but in the way that Forward Guidance has become.

The Financial Conduct Authority

The Director of Supervision at the FCA Jonathan Davidson told us this yesterday,

The consumer credit sector is by far and away our largest sector in terms of number of firms with almost 40,000 firms registered with the FCA. And as a sector you have been growing – according to the Bank of England, consumer credit grew 9.3% over the last year.

Regular readers will of course be aware of this and we have looked at the issues below too.

After all, none of us can forget the context in which we are operating. Total credit lending to individuals is currently very close to its September 2008 peak. The circumstances are different now than 10 years ago, but there are still worrying numbers of householders who may still be in too deep. For example, 1 in 5 mortgages today are interest only mortgages, many of which were made at the height of the credit boom to borrowers with little equity in their homes and not a lot of disposable income. And they won’t mature until about 2032.

Indeed the circumstances are different as for example real wages are lower but I am not entirely sure that is what he means! The reminder about the scale of interest-only mortgages does make me think that an establishment solution for that would be to push house prices higher, oh hang on! If we look around we see that such a policy has worked in the south-east and other areas but would be struggling for example in Northern Ireland. As to affordability I guess Mr, Davdson would point us to this from the Office for National Statistics.

The median equivalised household disposable income in the UK was £27,300 in the financial year ending (FYE) 2017. After taking account of inflation and changes in household structures over time, the median disposable income has increased by £600 (or 2.3%) since FYE 2016 and is £1,600 higher than the pre-economic downturn level observed in FYE 2008.

Of course the aggregate numbers can hide trouble.

The Bank of England’s Financial Stability Report last year noted that consumer credit has grown rapidly and that, relative to incomes, household debt is high. And there are a significant number of households that are in so deep that the slightest sign of rough weather could see them in over their heads.

If we go back to the press conference back then Governor Carney told us this.

So there are pockets of risk, consumer credit is a pocket of risk, it’s been growing quite rapidly.

That made him sound a little like the “pocketses” of Gollum in the Lord of the Rings, Unfortunately this was not followed up as the press corps was only really interested in Brexit but here are the numbers from the report.

The total stock of UK household debt in 2017 Q2 was
£1.6 trillion, comprising mortgage debt (£1.3 trillion),
consumer credit (£0.2 trillion) and student loans (£0.1 trillion). It is equal to 134% of household incomes , high by historical standards but below its 2008 peak of 147%. Excluding student debt, the aggregate household debt to income ratio is 18 percentage points below its 2008 peak.

Fascinating isn’t it that they continue the campaign to exclude student debt from the numbers. Maybe it is because it is growing so fast or maybe like me they feel most of it will never be repaid. But in my view you cannot ignore it because it is having effects and implications right now. Also there is the false implication that just because the numbers are not quite as bad as 2008 we can sing along with Free.

All right now, baby, it’s a-all right now.
All right now, baby, it’s a-all right now

Interest-Only Mortgages

Oh and if these are an issue then  genuinely vigilant regulators might be on the case here.

However, since reaching a low-point in 2016, the interest-only market is starting to show signs of life again as lenders re-enter the market………However more recently, there are signs that lenders are starting to expand interest-only lending again, which rose to £5.4bn in Q3 2017, a 45% increase on the previous year. ( Bank Underground).

Everything is fine

Back in January research from the Bank of England via Bank Underground told us everything is fine.

Insight 1: Credit growth has not been driven by subprime borrowers

Insight 2: People without mortgages have mainly driven credit growth

Insight 3: Consumers remain indebted for longer than product-level data implies

I have to confess I am always somewhere between cautious and dubious about such detailed analysis I have seen it go wrong and more often than not spectacularly wrong so often. After all the “liar loans” pre credit crunch would have officially looked good. Also the authors seem keen to cover all the bases.

But vulnerabilities remain. Consumers remain indebted for longer than previously thought. And renters with squeezed finances may be an increasingly important (and vulnerable) driver of growth in consumer credit.

Motor Finance

Mr.Davidson offered some reassuring words on this subject.

The growth of PCP contracts in the motor finance market is a good example of an innovation that has had a significant impact………

So financing of car ownership has become more affordable, allowing more consumers to have more expensive cars. Indeed, the number of point-of-sale consumer motor finance agreements for new and used cars has nearly doubled from around 1.2m in 2008 to around 2.3m in 2017.

This type of innovation, and business model diversity, paints a really attractive picture of your industry.

Is it a miracle? Well please now re-read the quote using the definition of innovation from my financial lexicon for these times which was taught us by the Irish banks which is claimed triumph followed by disaster. I guess such thoughts will be reinforced by this bit.

It is important to me that we continue this innovation in the sector,

Also although he does not say it I am for some reason reminded of Royal Bank of Scotland by this.

A key observation and concern for us is that there are some business models for which customers who can’t afford to repay the principal are profitable, sometimes very profitable


There is much to consider here and let me give you a clear theme. Individual speeches are welcome and well done to Mr.Davidson but a succession of them means that the establishment is not  preparing us for moonlight and music and love and romance but rather

There may be trouble ahead……..

There may be teardrops to shed

Whilst they will be mulling this line.

Before the fiddlers have fled,

If we consider the overall position the reverse argument to mine is that collectively the debt is affordable and in theory and up in the clouds with the Ivory Towers it is. But when we return to earth reality is invariably far less convenient as this from Mr,Davidson’s speech suggests.

We are also seeing younger people borrowing a lot more relative to their incomes than my, baby boomer, generation. Why is this? It’s because of:More student borrowing. Our financial lives survey showed that 30% of 25-34 year olds have a Student Loan Company loan. The higher cost of getting onto the housing ladder. Shifting patterns of savings, borrowing and consumption. You don’t need to wait, you can have it now.


Among 25-34 year olds, 19% have no savings whatsoever, and a further 30% have less than a £1000 saved to use on a rainy day. Indeed, 36% had been overdrawn in the last 12 months.

At the same time, the number of self-employed people in the UK has risen by more than 1.5m since the turn of the century (a 45% increase), and more than 900 thousand people currently are on zero-hours contracts. The gig economy is growing strongly.

When bubbles blow up or pockets develop holes in them it is invariably something relatively small that is the trigger. The consequences however are usually widespread.

54 thoughts on “The more we are told UK household debt is not a problem the more worried we should be

  1. So household debt, at this rate, will double in about 7 years, so no need to worry or do anything about it. Its just below 2008 pre crisis levels, so that all right then – relax!

  2. weren’t told by Bent or Bean that we should all go out and spend,spend.spend ?

    and lets start calling the so called “gig economy” by its real name – piece -work.

    time to face up to fact we’re getting poorer because our illustrious leaders over many decades put our money into Casino Banks .

    and poof! – it’s gone !

    Don’t worry !

    the light you see at the end of this tunnel ?

    its an oncoming train !


    PS: will the young remember when they could afford popcorn ?

  3. second thoughts

    maybe its us savers who are in trouble

    so face with unable to buy a house on my zero hours contract job , I rent – and I get income support

    I have a degree that’s effectively worthless but it kept me off the unemployment list until I was 23

    I’ll never be able to pay it back

    but I can borrow to buy cars , ipads, phones , etc

    so why not? I’ll never be able to pay it back and I have nothing of worth you can take from me
    ( except my liberty – are there enough prison cells? )

    And who will be up the creek without a paddle ?

    the Banks who lent me the money – but who cares?

    I can’t pay it back and the government can just print more to plug the hole in the Banks accounts .

    what do you guys think ?


    PS: beware of strong men with answers ………….

    • Forbin, I think you have nailed pretty much the economy as far as those workers aged 16-30 are concerned and their attitude towards it, why wouldn’t they do it? they have literally nothing to lose, apart from getting credit blacklisted and all that entails, there is probably a limit to the number of times they can do this – even in this country.

  4. We can keep going on about the nosebleed levels of debt in this country on this blog until the cows come home, but as my friends and work colleagues take great pleasure in reminding me, they can never raise interest rates, they know this, hence the constant jawboning of the markets by Carney over the years.

    According to Sens figures above, mortgages(£1.3tn) represent approx 81% of total consumer debt(£1.6tn).

    As long as householders can keep rolling over and fixing their mortgage contract every five years at around 3%, nothing is going to change.

    Should the Fed lose control of the bond market or just keep raising rates, everyone expects Carney to follow suit, it’s up to you whether you think he will, but it would crash the housing market he has so assiduously nurtured and bring about another banking collapse in this country a la 2008, so how likely do you think it is that it would be allowed to happen?

    • If Corbyn and his henchmen get into power then all bets are off as they will unleash forces they will not be able to control. At the moment the present lot can keep the plates spinning for quite some time by micro management and not doing anything very radical.

      • You should be praying that Corbyn becomes PM and very soon he has demonstrated he is capable of critical thinking and is mentally very tough.
        The fools who have been running this country for 40 years are inflating the money supply exponentially to keep the debt flooded economy afloat.

        • Certainly agree with your second statement but I hope you are joking about the first!
          Corbyns would be chancellor was fired by Ken Livingstone for fiscal incompetence – now that takes some doing!! I have watched Corbyn being interviewed on TV and he appears absolutely clueless. It worries me that they would pursue policies for ideological reasons without any idea of the economic consequences.

          • If you think Corbyn is worrying I am terrified by the current incumbent on every level and policy…incompetent is way too complimentary

          • “…. It worries me that they would pursue policies for ideological reasons without any idea of the economic consequences.”

            In relation to this statement and your previous statement here – “Pavlaki on March 13, 2018 at 7:23 pm said:

            What is disappointing about remain arguments is that it is always about about money or the economy and never about democracy and accountability”
            Isn’t this the pot calling the kettle black?

          • Hi JB – not sure if this will reply to your point re ‘pots and kettles, as there isn’t a reply link.
            I don’t see my statements as contradictory in any way. My comments about the EU refer to the fact that the EU is treating democracy ( for all EU citizens) with contempt as it seeks to put in place powerful politicians who are unelected and institutions that are not accountable. The recent power grab by Martin Selmayr is exactly the sort of thing I worry about.

            My concern with Corbyn and co is that they would pursue policies driven by ideological dogma that they know would hurt the country as a whole but would do so because their hatred of the system is such that they want to destroy it. Certainly there are issues that need correcting ( such as banking bonus excesses) however this can be achieved without wholesale destruction. I listen carefully to what Corbyn and McDonnell have to say and I do not hear anything progressive at all. I am hoping that the disaffected labour (genuine labour that is!) politicians will break away from momentum and it’s Marxist ideology and form a new party of the middle ground. The idea / intention has been made public.

      • Apart from borrowing over £1 trillion in 8 years, printing half a trillion £ via QE, giving another half a trillion £ to the banks via TFS/FFL to recreate a property bubble that hadn’t deflated, giving mug borrowers a 40% taxpayer funded deposit down to buy into the UK biggest ever property bubble via Help to Buy, which gifted 1 man £120mln for 1 years work in a job that not much more than a decade earlier paid nearer to £300k a year.

        Do you think Corbyn will beat that? As i think when things go tits up the Tory party will go for helicopter money in the same way Corbyn will, as the Tory party copy all Labours spending anyway.

        • The big property inflation started with Mr Blair and co however most governments have been complicit – because homeowners like it. Nothing makes them happier than the artificial wealth creation in rising house prices. On the back of that home owners spend and take on more credit so creating a virtuous circle. The thing that’s spoiling the party now is that few can get on the bottom of the ladder plus the bubble that has been created with ultra low interest rates in the race to the bottom with exchange rates. Painted themselves into the corner, they have.

          • No the Tory party are 100% to blame for the current mess, they’ve created this debt fuelled bubble and have hired Carney to do it.

            But you seem to want to blame Corbyn, Blair, Homeowners for all the policies your beloved Tory party have come up with.

          • ‘No the Tory party are 100% to blame for the current mess, they’ve created this debt fuelled bubble and have hired Carney to do it.’

            Darling and Brown did RBS,A&L,B&B,NR quite nicely.

            By sheer coinciddence they both managed to land jobs with big financial firms since-Morgan Stanley and Arthur Andersen respectively.

            This property/banking bubble has spanned continents and political systems

        • Have a look at a graph of UK house prices and see when they took off and when it had the fastest rise – 1997 onwards – and who came to power then? I would provide a link but computer wont let me!
          I am certainly not a Conservative supporter! I’m originally from industrial Tyneside and there’s not many from those parts! Trouble is there is no one to support these days – present government on one side and bunch of loony Marxists on the other. There’s no longer a labour party and no one in the centre.

          • I don’t need a link i know full well when the property bubble kicked off and why it kicked off.This was due to Majors TORY govt with the – 1996 Housing Act which revised the assured shorthold tenancy, giving landlords the power to evict tenants on a no-fault basis after just six months.

            Which gave birth to the Buy to Let mortgage.

            Now Labour could have reversed this but they didn’t but BTL was born under the Tory party.

            Now since 2010 when you have been given free money via house price inflation by your beloved Tory party they have done far more than Labour ever did to create their very own housing bubble A taxpayer and BoE sponsored one.

            Quite why you cant get your head around this fact i don’t know.

            I will vote Corbyn just to see the look on the face of boomers when their house can be bought with wages again. Your generation will hate such capitalism.

          • My rational for saying that labour presided over the greatest house price increase came from the Nationwide prices. 1997 Average price £58400, 2010 average price £168,719. Average today £209971.
            You seem to think I support government policy for the housing bubble! Nothing could be further from the truth. It would please me immensely if my kids (both in their 30’s) could buy property instead of renting – and as you say, bought with wages at a sensible multiple. As for my house; I really couldn’t give a fig what it’s worth. It’s a place I live in not an investment.
            I don’t know how we get back to this situation but I am sure that crashing the economy is not the way to do it and I’m fairly certain that’s what would happen if Corbyn gets into no 10.
            And once again for the record- I am not a Conservative supporter- however you may like to label me.

          • You ask and I comply –

            You may manage to note that there was a 100% house price increase between 1985 =- 1989 throughout the UK when the tories were in power.

            The next time there was a 100% increase in a relatively short time of 4 years was in the period 1999 – 2003 when labour were indeed in power but there is no point in blaming one party or the other, both are equally guilty and it can be seen this has been going on at least since the mid 80’s. I seem to remember reading somewhere there was another house price surge in the very early 70’s, so this has been going on for a lot lot lot longer than you think.

            If you want someone to blame look at the British public. You live in a democracy that you have banged on about in the past as being the holy grail. In such a system politicians look to appease the majority by delivering to them that which they most desire, which in the UK is ever rising house prices.

        • The half trillion (I think it’s actually £375 billion) QE to which you refer is included within your earlier trillion amount and you cannot borrow from your self when you have printed the money although they have borrowed somewhere in the region of £625 billion

          • Exactly what I said above – governments of all colours in most western economies pump up house prices because the voters like it. Until people start and see houses as a place to live and not invest in it will continue.

    • Yes they can print to infinity but at some point it will end in an economic meltdown at this rate US debt will exceeded$30T by 2026 confidence will be lost and the dominoes will fall..but they may start WW3 before that either way it will end disastrously.

  5. One problem seldom mentioned in relation to ZIRP is that many of those who took out repayment vehicles in order to pay for their home at the end of their Interest Only Mortgage, will find that they don’t meet the sum required.

    • Hi therrawbuzzin

      These issues are not new as back in the mists of time I remember my father borrowing £9000 to buy a house in Dulwich on the hill up to Crystal Palace. He took out an endowment and was disappointed ( his language was stronger than that…) with the return when it matured. Of course endowments fell into disrepute but that was later.

      As to more recent times then the rally in equity markets would have helped many investment vehicles but the managed funds typically used often under perform or at least that is my experience.

  6. On the subject of student loads and the music of the band Free, I would thought this lyric would be more pertinent
    “I’ll give you everything except my car,
    my car and my guitar”

  7. lets face it guys , they can get away with this because you don’t need a wheel-barrow of money to buy a loaf ….

    its all digits on yer Y-Fone


    Ps: what? how much for a 30g bag of popcorn? I’ll need to get a loan……

  8. Really thought provoking blog today Shaun that covers a few topics close to my heart.
    One point I would like to make is that the median/mean average of anything can hide a raft of nasties.I would love to see the figures for home ownership amongst those below the median average income and also their demogrpahic split.My point being that a lot of lower income deciles are renters and therefore the fact that they’ll be paying rent long into retirement is a liability that the figures cover over.
    As is the student loan scenario.It’s worht noting that previous generations of graduates were more likely to earn above the national average by some way but as university attendance has gone from 10% per year in the early 90’s to 40%,this problem with student loans will only grow.Worth noting as well that for those who don’t start paying back the money immediately,the compound interest on their debt means that £50k debt accrues at £3,500 per year(sadly students don’t benefit from QE)

    • Dutch, good math and I agree. Once you factor the group and demographic (49%) of youngs people and inevitably citizens who begin to vote as they age. You could wven argue that an early debt load may promote economic “skin in the game” and drive up voting stats fro the demographic.

      Personally I find it outrageous that boomers get QE enabled mortgages on BTLs for 2% and rentier away the young peoples disposable income whilst at the same time those young renters are paying 6% on their debt pile.

      You can bet vote winning future Govts will be cancelling student debt.

      • Paul, I’m certain the Govt will cancel the “debt” for reasons outlined to Dutch above i.e. I don’t view as “real debt” but an old fashioned student grant disguised as a “loan”..

    • Last time I looked a new graduate needs to be earning over £50k a year before they start paying back any of their loan – and of course this figure goes up the more years it takes them to start earning that much.

    • Student debt is written off after 30 years and that’s what will happen to 90% of it.

      You don’t have to repay anything until your earnings exceed something like £25000 pa (a guess) and then you only pay 9% of the excess between circa £25000 pa and your actual salary.

      It’s more like a deferred tax you incur if you earn enough than a loan, as most will never pay it off. In fact I’d say it’s a student grant by the back door with better paid ex students finding they have to make contributions towards the “debt” before the balance is written off in 30 years. I don’t know if it is counted when applying for other forms of credit.

  9. Shaun, thanks for reminding us. MC is vigilant of course, I think it was a calendar quarter ago he made soothing tones, consumer credit is falling, the rate of rise was falling of course. I think then he was making big beans of the drop from 9 to 8.7, what an amazing fall and shift to ameliroation! (sarcasm.)

    So now you tell me its gone back up and is a 9.3% growth….

    Compounding is a runaway train so I pity the over-reached, those on loan shark and pay day rates.

    What with the bubble pricing in property and the borrowing against home values in addition to this unsecured lending the UK is very ill equipped for rate rises.

    Assuming Carney trails the Trump economy rises then that too will form a pressure cooker. As US pushes past 2% and towards 3% base rates then currency pressures will mount on Sterling. Ive heard that Trumps tax reform as dragged 10% of offshored money back home and already caused a tightening of liquidity.

    Maybe EU and UK can hold out until the summer but after UK holiday makers have taken a currency drubbing I can see fireworks in the autumn.

    The markets love to reassess in October.

    • Hi Paul

      There was an particularly odd bit in the Davidson speech which your mention of compounding reminded me of.

      “We use your services extensively whether it is to borrow to finance a car, a computer, a sofa, to make ends meet towards the end of the month or to tide us over an unexpected and temporary drop in income.”

      Yet if we think of the last 2 points how does that go with a speech where the title starts with “Getting affordability right” ?

    • US liquidity squeeze causes commenced last summer and were always due to come to fruition about now. If the tax reforms have caused onshoring of money then this will raise the probability of easing if the cash is introduced into investment channels/ financial markets.

      UK will do OK this year. the dollar has commenced a weakening phase in it’s cycle so less pressure for UK rate rises although rate rises are not off the table.

  10. Hi Shaun

    People over 55 tend to consume less than prime working age folk and consumption goes down steadily from this age onwards. Many people are now shifting into this category and what this means I think is that the debt problem in the prime working age segment is worse than it appears on the surface despite the protestations of the BOE.

    As regards the BOE, and as has been said above, they cannot increase rates because of the debt levels and will do so only under force majeure and it will have to be pretty “majeure”. It is only when you see the economy as a house of cards that any of this makes sense and that indeed is what it is.

    • Hi Bob J

      I was thinking of another way that those over 65 have benefited and that is via the triple lock on the state pension. It was not in the numbers I used above but improvements in household income in the credit crunch era have been for those who have been older mostly because of it. Oh what a tangled web and all that as of course the bulk of the debt is elsewhere.

    • Consumption patterns change as people age, they do not reduce. Older people will go on less holidays and buy less cars/stereos/TV’s etc but replace that lost consumption with higher consumption of medical services/drugs etc.

  11. I like to use empirical evidence where it’s available so for the UK see Japan. We’ve basically done exactly as they did and of course we got exactly the outcome, why is anyone surprised? The UK is in for a long slow bleed, we don’t want to as far into QE as Japan but we can’t find a way out either, we’re stuck where we are.

    The next crisis won’t come from the UK it’ll be American and it will be private sector driven, ie “The Precious”. They will crash the economy again and they will get bailed out again. I believe it’s called The New Normal.

  12. Great Blog today Shaun my favourite subject if we discount the increasing threat of nuclear conflict by the fools that are in charge in various countries then it is the rising debt that will destroy our society.It is having a detrimental effect at the moment wages are falling,legalised loan sharks like quickquid are prospering when the bubble bursts and the dominoes fall the financial system will be wiped out,they are leveraged to the hilt…this must end at some point

  13. As a net saver, in theory ‘all your base are belong to us’. But you all owe so much, I’m worried you hold all the aces….and the assets….and the ear of government.

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