Is the UK’s Addiction to Debt Storing up Demons?

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Nick Newton
18th August 2014

Verum Financial Research recently conducted a report using a detailed analysis of consumer spending and borrowing trends based on data from the Office for National Statistics (ONS) and the Bank of England – and the findings are interesting to say the least.

As Professor James Flitchett of the University of Leicester explains:

“The main problem facing the UK economy is therefore, now a problem concerning consumer spending and debt.”

As this data shows in considerable detail, the prospect of even slightly higher marginal lending rates could have a catastrophic effect on the economy.

In short, the report suggests that as a nation we’re over reliant on debt and our obsession with house prices is an accident waiting to happen. You can read the full report but we’ve summarized the key conclusions below.

The report makes some fairly obvious conclusions, for example, increasing debt in the UK can be, and is, linked to rising house prices – in 2013 mortgages accounted for the highest proportion of consumer credit at 49% with £176.4 billion borrowed for mortgage finance. To put that into perspective, in 2000 this figure was approximately £90 billion. While credit cards accounted for 38% with a figure of £138.6 billion borrowed in 2013.

In fact, mortgage debt and credit secured against property now accounts for 89% of the total credit outstanding owed by households, with credit cards accounting for 4%. The report goes on to explain that over the period of 1990-2013 household debt rose by a staggering 314% while house prices rose by 319%.

This also has a domino effect on several other aspects of the economy – high mortgage debt can have implications for companies in other credit-sensitive sectors, for example there is a direct link to write offs of mortgage debt by banks and personal/household insolvencies, both of which have risen significantly since the 1990 recession.

More worryingly, this debt can constrain economic growth with household debt growing much faster than household incomes. Consequently, high debt households face a major risk if interest rates rise – this is highlighted by the evidence in the report that shows an increase in interest rates to 3% would be enough to tip the economy into a recession, largely due to high debt-servicing costs.

A long way off you may think, but as the Bank of England confirmed in their recent inflation report, they expect interest rates to reach 2.5% within the next 5 years. What is most clear on the back of this report is that as a nation we need to act, and we need to act fast. There is a very real requirement to wean our population off debt, and a definite need for more pension investing to address the imbalance.

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