Is it all about the debt for UK individuals?

One of the issues of the credit crunch era has been the subject of debt. Often it is sovereign debt that is discussed but of course the private-sectors of the world often also piled it up in the pre credit crunch era. This is a factor in the policy response of many central banks who have cut interest-rates sharply and increasingly even into negative territory as a way of cutting the interest or running costs of such debt. A problem with this is that whilst it may provide something of a short-term boost it also encourages the accumulation of yet more debt as incentives for saving are reduced and the cost of credit drops. It provides an incentive for behaviour which is exactly the reverse of the deleveraging which is what central banks claim that they want. Also we have seen that in our increasingly fractured and divided economic world the interest-rate cuts do not directly reach the areas that most need them. An example of this has been the periphery in the Euro area.

The UK

There have been two main additional measures in the UK to reinforce the credit position. First cam some £375 billion of Quantitative Easing by the Bank of England and second the summer of 2012 came its Funding for Lending Scheme which boosted mortgage lending and our banking sector. Today I wish to widen the analysis of its impact and also consider how it has impacted unsecured lending such as personal loans and overdrafts.

Unsecured Borrowing Surges

Price Waterhouse produced a report last week with some numbers which will send a chill down the spine of those familiar with UK economic history.

Britons added nearly £20bn to their total unsecured borrowing during 2014, an increase of nearly 9% on 2013 – the largest percentage rise in more than a decade.

As Karen Carpenter sang so beautifully, such numbers remind me of this.

All my best memories
Come back clearly to me
Some can even make me cry.
Just like before
It’s yesterday once more.

The likely  trends according to PwC are as follows.

Total unsecured borrowing now stands at £239bn, the equivalent of £8,936 per household …. PwC projects unsecured borrowing will grow over the next two years by between 4% and 6% annually. This projected rise would leave the average UK household with unsecured borrowing of close to £10,000 by the end of 2017, taking consumers into uncharted territory in terms of borrowing levels.

That phrase “uncharted territory” in terms of unsecured borrowing sends a sharper chill down the spine. What could go wrong?

One feature of these numbers is the inclusion of student loan debt in the PwC numbers as many versions these days omit it. If we consider the position of student loan debt whilst we hope it is secured on our student’s futures it has no bricks and mortar backing so they do have a  point. Also it is important that we allow for its rise and do not shuffle it down some statistical back-alley as some of the official data tries too. I guess they do not want to record the impact of the rise in tuition fees.

The average student loan value in 2014/15 is £11,710, a jump of more than 35% on last year’s figure.PwC estimates that the typical student who began university post 2012 will graduate with unsecured debt of between £40,000 and £50,000.

 

Of course this is debt but in some respects not as we know it as it often does not cost anything for a while and there are doubts about how much will ever be repaid but it is debt nonetheless. So we find a new facet of an old problem. It always leaks out somewhere doesn’t it?

Today’s data

If we look at today’s Bank of England data we see that this is one area where it has been able to generate some credit growth.

Consumer credit increased by £0.7 billion in February,compared to the average monthly increase of £0.9 billion over the previous six months.The three-month annualised and twelve month growth rates were 4.9% and 6.6% respectively.

I would not get too hung up on the monthly number as it is an erratic series which is also affected by rounding but an annual growth rate of 6.6% is more than double our rate of economic growth. A more exact breakdown is given below.

Within consumer credit, credit card lending increased by £0.2 billion in February in line with the average monthly increase over the previous six months. Other loans and advances increased by £0.5 billion compared to the average monthly increase of £0.6 billion over the previous six months.

In case you were wondering the total amount of unsecured debt in the UK was £169.1 billion in February according to the Bank of England. Also the range of growth rates goes from a frosty -2.3% in June 2010 to a red-hot 21.5% back in the early part of 1988.

Interest-Rates on Unsecured Debt

This is a story of two halves. So let me start with the sector which has seen a change and that is personal loans. If you were to borrow £10,000 now then the Bank of England has you paying some 4.5% as opposed to the 6.69% of two-years ago so quite a change. So it is no surprise to see more borrowing in this area as I wonder if it is related to this. From the Society of Motor Manufacturers and Traders or SMMT and the emphasis is mine.

The number of new cars registered has risen every month since March 2012, as the UK continues to bounce back from the recession and consumer demand has been driven by exciting new products and attractive finance deals.

Exciting new products sounds rather like the “innovation” of Irish financial products pre credit crunch.

The other half is of interest-rates on credit cards (17.8%) and overdrafts (19.7%) which have been rock solid over the past couple of years. In fact they have moved little at all in the credit crunch era in spite of all the official interest-rate cuts and measures we have seen.

Also there is another factor which is that the range of interest-rates offered these days varies very much with one’s credit rating and I wonder how well the Bank of England data catches this if at all.

Comment

There is much to consider in the UK private-sector debt position. You see even the extraordinary push provided by the FLS only managed to push net mortgage lending just into positive territory as shown by the numbers for February.

Gross lending secured on dwellings was £16.2 billion and repayments were £14.5 billion.

I guess the official fear here was a period of net falls in mortgage lending which in another twist to the tale is of course what they have often claimed they want! So the boost to unsecured lending has helped give the economy another nudge forwards for now at least.

Intriguingly however the real surge has come from student loan debt. As the Bank of England data ignores it then I will move to HM Parliament data. At the end of the 2013/14 fiscal year it amounted to £54.3 billion as opposed to the £40.3 billion of 2011/12 and this is what is expected to happen next.

This is expected to grow rapidly over the new few years and the Government expects the value of outstanding loans to reach over £100 billion (2014-15 prices) in 2018 and continue to increase in real terms to around £330 billion (2014-15 prices) by the middle of this century.

For those of you wondering how much we owe as individuals in total the Bank of England calculates it at £1471 billion but it does not include student loans.

In a way this is a ying to Friday’s yang for the UK economy. There we see the positive impact of disinflation boosting the economy whereas today sees something familiar but not so friendly.

The Economic Generation Game in the UK looks increasingly unfair to me

Today is one where one of the themes of this blog has hit the wider media. It is the argument that modern economic policy favours different age gaps and accordingly benefits some age groups much more than others. Specifically it tends to favour the older over the younger if we make a sweeping assumption. Whilst there may be elements of an explicit plan here actually I think that most of it is due to the fact that the establishment which as Malcolm Rikfind so (un)ably demonstrated on the BBC yesterday thinks it has a right to both money and power, looks to enrich itself and its acolytes. Financiers and the wealthy of course tend to surround those in power and inflate their egos in return for morsels of information about what will happen next. In a world where front-running central banks is the main game in town it obviously helps to know the next chess move! Accordingly both power and wealth tends to congregate and policies favour those with existing assets of which there are simply more of them as we get older.

An explicit move

The election period tends to see moves to favour older people simply because they are more likely to vote. An example of this was seen only yesterday. From the BBC.

Universal benefits for pensioners will once again be protected if the Conservatives win May’s general election, David Cameron has said.

Actually there is a bigger promise made by all the leading parties which tends to be ignored.

These benefits cost £3bn a year. That is small when you consider that all the main parties are willing to spend hundreds of millions of pounds during the next Parliament by sticking with the “triple lock” protection of the state pension.

Sorry about the BBC’s mathematics,apparently hundreds of millions is more than 3 billion in their world! But the fundamental point is that the cost of the “triple lock” is unknown but expensive should inflation be high or low (the 2.5% guarantee).

Also there are the Pensioner Bonds for those over 65 which offer savings rates of 2.8% for one year and 4% for three years when the respective Gilt yields are more like 0.3% and 0.6%.

Quantitative Easing

This has been a policy which has benefitted those with existing financial assets including some which have been saved from going bust as we examine an ever-growing list of moral hazards. You do not have to take my word for it as here is the Bank of England from July 2012.

Many more companies would have gone out of business.

But later comes the crux of the matter as the Bank of England puts a positive spin on what it has done.

As a result, the Bank’s asset purchases have increased the prices of a wide range of assets, not just gilts. In fact, the Bank’s assessment is that asset purchases have pushed up the price of equities by at least as much as they have pushed up the price of gilts.

You may note that it does not mention the price of houses which across the wider population is the main player here. Perhaps that truth is simply too painful. However there was a confession that it had contributed to inequality.

By pushing up a range of asset prices, asset purchases have boosted the value of households’ financial wealth held outside pension funds, but holdings are heavily skewed with the top 5% of households holding 40% of these assets.

Or putting it another way.

Looser monetary policy also typically pushes up asset prices (sometimes referred to as the ‘wealth effect’), so those households with significant asset holdings will benefit by more than those without

Now there will be plenty of older people with few or no assets and some with negative ones and some younger ones with a portfolio but in general the older you are the more likely it is that QE boosted your asset position.

Funding for (Mortgage) Lending Scheme

This in many ways is the main player in an intergenerational transfer as in spite of being badged as a boost to business lending we saw mortgage rates fall and lending rise in response to it. Very quickly house prices rose benefiting existing owners who are in general of a certain age overall and making life more difficult for first time buyers who in general are younger and often much younger. It was a particularly perverted piece of language which saw such policies – there is also Help To Buy – as benefiting first time buyers.

In a type of timing that may not have been an accident this policy began in July 2012 or the same time as the Bank of England report when the average UK house price was £234,000 and as of December 2014 it was £272,000. Of course there may be other influences but ta the time house prices were simply drifting and it has hardly been either wage growth in either its nominal or real forms which has drive prices higher!

So existing house owners have a more valuable asset whilst new buyers have to pay more and out of an income which in general has risen by much less.

Wages and student debt

If we look from the perspective of the younger than their world is one where thankfully we are seeing more employment but the question at hand is the price of it. Wage growth as I have written on previous occasions has fallen considerably and whilst there is a new hope for real wages they have fallen by around 10% in the credit crunch era depending on the inflation measure used. Indeed a reply to the Financial Times article makes this claim.

Real wages for the under 25s have fallen so far that they are now back to 1988 levels,

If we move to the balance sheet ledger we see that more and more of our younger people are being weighted down by larger and larger amounts of student debt. From HM Parliament.

Currently more than £10 billion is loaned to students each year. This is expected to grow rapidly over the new few years and the Government expects the value of outstanding loans to reach over £100 billion (2014-15 prices) in 2018 and continue to increase in real terms to around £330 billion (2014-15 prices) by the middle of this century.

This is of course before they are expected to join the queue to take out a mortgage to purchase a house (which is now much more expensive). I regularly mention that we are increasingly living in a world described by the novel Dune and this part seems much more Harkonnen than Atriedes to me.

The Financial Times

The FT has entered the debate by quoting from the UK Data Service which has 50 years of data. First we have the declining position of the young.

Despite the trials of inflation and unemployment in the 1960s and 1970s, people aged between 20 and 25 with average incomes after housing costs were better off than at least 60 per cent of population…..they can now expect only 37 per cent of the population to have lower incomes after taking into account housing costs in 2012-13.

Now the improving position of the older part of the population.

Replacing the young in the premier league of living standards have been people in their 60s and 70s. The average 65-70-year-old used to have lower living standards than 75 per cent of UK families. Now people in the same age group can expect to be almost in the top 40 per cent of family incomes.

There are a couple of caveats which come to mind here. Firstly these are relative rather than absolute numbers and secondly the FT quotes house prices as an influence on income rather than wealth. Perhaps it is implicitly admitting that buy to let is more of a player than many might consider but I will mull that one a bit. Or it might be the income from the funds released by those who have taken their profits.

Comment

In any analysisof this type there is always a broad brush and something of this from The Specials.

He’s just a stereotype
He drinks his age in pints
He has girls every night
But he doesn’t really exist

For example I am sure that there are predominantly older savers reading this wondering about the consequences of a Bank Rate which has stayed at an emergency rate of 0.5% for nearly six years now. The impact was reinforced by the implications of the FLS as savings rates were pushed even lower.

But the fundamental trend of a “can-kicking” strategy is that there is a transfer of wealth from the future to the present and that plainly benefits those alive now at the expense of those who will be alive then. There are many advantages to being young and they are alive at a time of great advancement in many ways but economics and fairness are not one of them.

Oh and I did like this reply to the FT which poaches some of my musical references theme but raises a smile.

Prince should have actually sung the song ‘Party like I am 99’