Are we living beyond our means in the UK?

This morning has seen the UK Office for National Statistics enter the fray around whilst is something of a hardy perennial amongst economic questions.

UK households have seen their outgoings surpass their income for the first time in nearly 30 years, our data have shown.

I have to confess my first thought was are you sure about the 30 years? But let us suspend that particular critical facility for a moment and continue.

On average, each UK household spent or invested around £900 more than they received in income in 2017; amounting to almost £25 billion (or about one-fifth of the annual NHS budget in England).

Households’ outgoings last outstripped their income for a whole year in 1988, although the shortfall was much smaller at just £0.3 billion.

Even in the run-up to the financial crisis of 2008 and 2009 – when 100% (and more) mortgages were offered to home buyers without a deposit – the country did not reach a point where the average household was a net borrower1.

Significant factors here will be regular topics such as the higher inflation of 2017 raising expenditure and the continuing struggles of wages growth. Although the next point raised may result in a strongly worded letter from an angry Canadian in the heart of the City of London.

To fund this shortfall, households either have to borrow – at which point they could be living beyond their means – or dip into their savings.

And our data show they are borrowing more and saving less.

Households took out nearly £80 billion in loans last year, the most in a decade; but they deposited just £37 billion with UK banks, the least since 2011.

Why might borrowing be attractive? Oh yes.

We’re borrowing more and saving less partly because the interest rate – which dictates returns on money saved and the size of loan repayments – has been at or near a record low for the past decade.

The base rate set by the Bank of England is just 0.5%, compared with almost 15% in 1990, making financial conditions better for borrowers rather than savers.

That of course does not give the Bank of England enough credit as until November the Bank Rate was 0.25% and nearly for the whole year it was supplying liquidity to the banks via the £127 billion Term Funding Scheme. It had also back in August 2016 started other Sledgehammer measures such as £10 bililion of Corporate Bond purchases and £60 billion of UK Gilt ( QE) purchases. These moves led to a succession of record low mortgage rates which perhaps the ONS is not aware of but it has spotted a likely consequence.

Households’ investment reached a record high of £74 billion in 2017, most of which was spending on new homes and major home improvements.

This provokes two lines of thought. Let us start with my subject of Monday where we noted a case of someone buying a new kitchen presumably expecting his house would rise in value by more only to discover that it was not that simple. Next is the issue that something ordinarily regarded as a “good thing” investment seems not to be quite so clearly so here.

The nib on the fountain pen of our angry Canadian may fracture under the pressure as he notes that even being unreliable has contributed.

Recently, the Bank of England has been warning the country to expect interest rate rises. Expectations of an interest rate rise can affect saving and borrowing behaviour. Borrowing could rise in the short-term as households seek to take advantage of smaller repayments, while saving could be put off amid the prospect of higher returns in future.

At this point our angry Canadian will be torn between pointing out he saved 250,000 jobs and venting his spleen by calling in Chief Economist Andy Haldane and asking for a report on developments with his adviser Billy Bragg. Oh and when did over 4 years become “recently” please? As to the pen’s nib I would not be too worried as after all there is no shortage of gold to repair it with at the Bank of England.

There was something rather familiar to readers of my work although of course something confusing for those who believed the past Bank of England claims that there was no unsecured credit boom.

The stock of consumer credit – including credit cards, car finance plans and payday loans – has risen by nearly one-third in the last five years. Car finance is comfortably the fastest growing type of credit, with nearly 90% of new car purchases now funded this way.

I think actually car finance was the fastest growing type of credit is better as the slow down in sales will put a brake on things.

The amount of money owed in short-term loans has surpassed its pre-crisis level. These loans do not require any collateral (such as a house deposit) to be approved, but they’re expensive to pay back because they demand higher interest repayments.

Oh and here is an example from the BBC of an official body getting ready for an interest-rate move.

National Savings and Investments (NS&I) is cutting the interest rate it pays on its Direct Individual Savings Account (ISA), affecting nearly 400,000 savers.

From 24 September, NS&I will reduce the rate on its Direct ISA from 1.00% to 0.75%.

Ch-ch-changes

Can anybody think how our financial behaviour might have been influenced so that we have become more like Canada?

Meanwhile, the average household in Germany and France has always been able to cover their outgoings without turning to debt, partly because they’re historically bigger savers than the UK, Canada and the US.

For a long time, the average UK household was in a similar position to those in France and Germany. However, we’re now much closer to Canada and the US than our European neighbours.

Comment

As I noted this work appearing on social media I started to wonder if it would turn out to be like that Swiss cheese with the holes in it? There are elements of that because if you are looking at borrowing in this way I think you also need an idea of asset backing ( if any) and also a realisation that some of the numbers will not be known. For example I can see how we should know the amount of bank deposits in the UK but share investments especially abroad are far from clear.

If we look at the numbers there is an unsettling tone as I note that the report talks about a financial year and the numbers are for calendar years. But I know people like them so here we go. UK financial assets at the end of 2017 were £6.6 trillion and our angry Canadian might be mollified as he notes that it has grown from £5.2 trillion in the year he took up his post especially as he can then add to it the rise in house prices. By far the largest player is pension schemes at £3.8 billion with bank deposits next at £1.57 billion.Against that total debt is £1.8 trillion so looked at like that we are (trillions of) quids in.

Except of course the £3.8 billion is against a future liability which is missed out and we are often somewhere between poor and hopeless in measuring them. From Josephine Cumbo of the Financial Times.

The adoption of a higher discount rate by USS is in keeping with other private sector schemes. This year, Tesco sliced its DB deficit largely by increasing its discount rate from 2.5% to 2.9%.

In addition there is the issue of maybe people have borrowed because they think ( perhaps are) wealthier. Or at least some are as we are reminded that in the era of the 0.01% there is a clear case of what Pink Floyd described as “Us and Them”

Meanwhile as a cricket fan let me note that there seams to have been a late swing to Imran Khan in Pakistan.

 

 

26 thoughts on “Are we living beyond our means in the UK?

  1. Shaun, I am glad that you raised car finance schemes as this has to be one of the most significant increases in liabilities for the average household. It can be seen everywhere as people are taking on cars that they really cant afford. Instead of having to save up to buy say a Ford Focus they can now enjoy instant gratification and have a BMW instead if they stretch themselves just that little bit more every month. And they do, in huge numbers. I have never seen so many new flashy cars om the road as there are today. So many fancy cars ‘owned’ by people who really can’t afford them or who are now having to cut back elsewhere or are getting into debt problems. I really don’t want to sound like a Cassandra but this could well end in another sub prime lending crash.

  2. Shaun, finally the unreliable boyfriend casts off his cloak and reveals himself as the Master of the Universe that we have been paying for all these years:

    “Expectations of an interest rate rise can affect saving and borrowing behaviour. Borrowing could rise in the short-term as households seek to take advantage of smaller repayments, while saving could be put off amid the prospect of higher returns in future”

    By repeatedly promising to raise rates, he is tricking the public to bring forward borrowing decisions. Fool us once, shame on you; fool us many times over the last few years . . .oh dear.

    • Hi DoubtingDick

      Maybe a little but I doubt it is that major an effect compared to the many years now of ever easier money. Those that remortgaged after his Forward Guidance about higher interest-rates might use rather harsh language about him being a Master of the Universe.

  3. While in 88, there was the same belief that house prices would keep rising, so you could always sell up if necessary, the difference back then was also that there was an expectation of pay continuing to rise. This time, many people are literally betting the house, hence the monetary policy being more stupid after 09 being more stupid than it was in the past.

    • Hi David

      There was the warning signal of the beginning of the end of MIRAS back then ( for younger readers you could get tax relief up to £60,000 back then and you could buy a fair bit for that back then ). The Bank of England recorded it thus.

      “Budget. Abolition of multiple mortgage tax relief with effect from 1.8.88 prompts a surge in mortgage lending April-July. Also abolition of tax relief for loans for home improvement with effect from April prompts some rise in such lending in March. ”

      So the attempt to slow the market actually sped it up in the short-term. It was added to by something which might require those of a nervous disposition to look away now

      “17. 3.88 Banks’ base rates fall from 9% to 8½%. then 18. 5.88 Banks’ base rates fall from 8% to 7½%. ”

      Then later in the year a sequence of events which would have Governor Carney demanding another strong Martini.

      “2. 6.88 Banks’ base rates rise from 7½% to 8%.
      6. 6.88 Banks’ base rates rise from 8% to 8½%.
      22. 6.88 Banks’ base rates rise from 8½% to 9%.
      28. 6.88 Banks’ base rates rise from 9% to 9½%. “

      • I was in South America at the time – many people said I should have used the money to buy a house.

        I actually decided to go in March 88 after seeing M3 growth at 25% – and I already knew Lawson was a useless clown.

  4. For several decades now, the UK consumer has enjoyed a standard of living and spending power way above that which his economic output has warranted or deserved and has been totally disconnected from the country’s economic performance and balance sheet.

    As Steve Keen has ponted out on numerous occasions, for hundreds of years the level of consumer borrowing to GDP in this country was constant at around 70-80%, then Thatcher got in and it went to 180%, and everyone thought they were rich, and they convinced themselves they were rich because they were clever, or they were “shrewd” (see buying houses and selling them for more than you paid for them), or somehow “deserved” it because they worked hard or you started a business, or you voted for Margaret Thatcher and she made the conditions right for you to get rich. Everyone who got rich justified it to themselves somehow, but it was all an illusion based on debt, and bringing forward consumption from the future to now. This “wealth” permits the UK consumer to have a spending power that is completely divorced from economic reality and thus sucks in even more artificially cheap imports(exacerbating the trade deficit further).

    And yet every year the trade deficit fails to be filled, the Bank of England has to print £ to balance the books, every year the housing bubble grows due to lower and lower rates and the willingness of buyers to buy at higher multiples, the money to buy these houses comes from where? oh the keyboard of the bank issuing the mortgage-more £ generated from thin air, just like the money to cover the trade deficit,, the “wealth” the owners of these properties feel, emboldens them to buy more consumer goods, spend on improvements to their golden goose of a house and BMW’s and foreign holidays, maybe even buying a foreign property or a buy to let property.

    And this whole process is a positive feedback loop, where higher house prices lead to more borrowing and more spending and more speculation.

    And so the average bloke hearing this would ask if this is so obvious why hasn’t sterling collapsed or interest rates risen to correct these conflicting economic conditions???

    And as we are about to find out with BREXIT, the pigeons will all come home to roost all at once.
    You only get to rock the boat so much with the globalists, if you step too far out of line, the transgressions previously ignored(see above) are then used as the reasons why the currency is suddenly no longer wanted anywhere in the world at any price and interest rates that previously seemd locked into zero for eternity suddenly start to rise inexorably.

    You voted the wrong way people and if Treason May cannot negotiate a weasel worded betrayal deal that guarantees the UK remains in all but name without a Tory leadership revolt, the above is on the cards.

    • “…emboldens them to buy more consumer goods, spend on improvements to their golden goose of a house and BMW’s and foreign holidays, maybe even buying a foreign property or a buy to let property….”

      Well that IS the economy , after all we sold off almost everything else and I include the private companies in this , look at the Fab Five and what they did to Rover Group.

      If these globalists get their way , as you say , citizen Corbyn will be in next ………and he hasn’t left the 80’s

      BBC : -The denial came after its star, Robert Lindsay, said he had been “chased” by a TV company with “a fantastic idea” for updating the show.

      perhaps the Corbyn connection was too much for the BBC…..

      Forbin

    • in a dusty corner of Whitehall , a small smoked filled room , too dark to make out who’s sitting at the old nicotined stained mahogany table….

      “Brexit ? ”

      ” Just as planned !! , eheheheheh”

      Forbin

    • Yes, the funny thing is that 1/2 the population or more has experienced declining lifestyles (mainly immigrants – who were poor to start with and young people who never knew better). But a significant minority of triple lock pensioners and rentier folk have done very well indeed… then there lots of homeowners who feel just plain wealthy… Divide and rule.

      • piffle!

        1,significant minority of triple lock pensioners – not my dad as he’s poorer still

        2, rentier folk have done very well indeed – oh yes indeed , agreed , including the Banks who lent to them…..

        3, lots of homeowners who feel just plain wealthy.. well since debt is no wealth I’m sure they’ll find out in the end – and without these “useful idiots” we’d have no economy to speak of ( oh deary me ! )

        a fair few of us home owners would like our sons and daughters to be home owners too – not with the current inflated house prices

        let ’em fall – you know my feelings on this from previous posts

        no changes will be EVER be allowed that hurt the life blood of the UK economy – the TBTF Banks …

        All hail our Banking overlords !!

        Forbin

  5. Shaun, that is a rhetorical question. Of course we are lving beyond our means! Just like many of our fellow citizens in the other developed nations.

    The UK population is so blatantly obese, status conscious, service consuming and myopic that they feel they actually deserve this and a lot more beside. Indeed the motor vehicle escalation as described above seems to know no bounds, folk who could only dream of a premuim german marque are now aspirational for luxury brands whcih seem tantalisingly in reach, Maserati, Bentley, RangeRover… well why not, we’ve earned it in our shrewd property investments…. havent we?

    I do not want to even try and describe to people whom I know personally what is happening… (when debt armageddon unfolds). I am not sure I even want to be near any of these felllow Britons when the “sh#t hits the fan”. You just need to read Martin Wolfs current trilogy about China in the FT to know that we, ourselves may not be culpable for the actual trigger of self-realisation. In a similar way to how many were duped that we were not actually complicit in the 2007 blow-up… indeed there will be all kind of navel gazing about just “how did this happen?” even the Queen might ask Mark Carney, “how did you let this happen…?”

    But in the meantime, lets enjoy the dream, upgrade our PCP vehicle, book that summer cruise to Italy and throw coins at pink casino (on my tablet or phone or both).

    🙂 Paul C.

    • Hi Paul C

      This time around the Queen might reasonably say to Mark Carney “why did you contribute to this happening?”. Yes the question in the title was rhetorical but was also aimed at the official numbers which I doubt are particularly accurate.

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