"Increasing levels of personal debt are raising concern- but for the time being at least the economy looks resilient enough to deal with any uplift" - Lawrie Holmes
On the face of it, personal indebtedness in the UK appears to be rising to the point where alarm bells should start ringing.
The Findings & Figures
In October 2017, the Financial Conduct Authority, in its ‘Understanding the financial lives of UK adults: findings from the FCA’s financial lives survey 2017’ noted that 4.1 million people are in financial difficulty. That is, “they have already failed to pay domestic bills or meet credit commitments in three or more of the last six months.” The survey, the biggest ever by the FCA, said that half of the UK population are potentially financially vulnerable. The cohort that shows the most over-indebtedness (“keeping up with domestic bills and credit commitments is a heavy burden”) is 25- to 34-year-olds. Of these, 23 per cent are over-indebted and the age group accounts for 37 per cent of all payday loan holders. Unsurprisingly, the greatest financial vulnerability – at 77 per cent of those surveyed – was found among the unbanked and the unemployed, who represent around 3 per cent of the adult population.
What does this mean?
A primary question for both lenders and borrowers is how the debt is managed – and they may well take a different view on what is desirable. Price comparison website comparethemarket.com reported that more than six million Britons do not believe they will ever be debt free, according to research it had commissioned, and that the average person in the UK owes £8,000 – on top of any mortgage debt. That sounds good for lenders but rather less helpful for the borrowers.
To try to get on top of the debt, those surveyed by comparethemarket.com employed a number of strategies beginning with using up existing savings and not eating out. As inflation goes up, pay growth lags behind price rises and the Bank of England raises interest rates, the question is whether those feeling the pinch will take on more debt, or do their best to deleverage. Both are potentially problematic for the economy, but not everyone is concerned.
Paul Hollingsworth, a spokesman for Capital Economics, said although the consultancy recognised household debt has continued to reach new record highs, it makes sense to express it as a share of disposable income, rather than purely in nominal terms. “While the debt to income ratio has been creeping up over the past few years, it is still below the levels reached prior to the financial crisis,” he said.
“What’s more, given the ultra-low level of interest rates, the burden of servicing this debt is very manageable. And households in aggregate should be able to tolerate the moderate increases in interest rates that are expected over the coming years. It’s also worth noting that the value of households’ assets have increased substantially as well over recent years as house prices and other financial assets have been boosted by loose monetary policy and a recovering global economy. As a result, net debt looks a look healthier,” he said.
What are those who deal with problem debt seeing?
The Citizens Advice Bureau (CAB) said the number of debt issues it had dealt with in the 12 months to November was broadly the same as the figure for the previous year. A spokesman for the CAB said the figure of 344,000 debt-related issues in the period accounted for about 23 per cent of the total 1.5 million visits.
In October, ratings agency Standard & Poor’s warned that the rise in UK consumer debt was unsustainable and should raise “red flags” for the major lenders. But in a recent report, Martin Beck, chief UK economist at consultancy Oxford Economics, was more optimistic saying that UK banks are far better capitalised than they were leading up to the financial crisis.
“Banks have significantly increased bad-loan absorbing capital buffers since the financial crisis – the aggregate common equity Tier 1 capital of major UK banks was 13.9 per cent of risk-weighted assets in January 2016 compared to 7 per cent at the end of 2012,” said Beck in the report. “Moreover, the financial crisis which struck UK banks in 2008-09 was not caused by excessive lending to UK households. The crisis was primarily a consequence of the expansion of UK banks’ overseas balance sheets, particularly involvement in the US sub-prime market, along with lending to the commercial property sector at home,” he added.
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