UK household debt versus assets

Thrugelmir

Good piece from Jeff Randall in yesterdays Telegraph.

British consumers’ heavy dependence on debt is not a product of the banking crash and subsequent recession. It took root during the Great Delusion, 1997-2007, a time when Gordon Brown was busy abolishing boom and bust. So good was the feeling of living beyond our means that disbelief was suspended by a conspiracy of irresponsible lenders, reckless borrowers and the then Chancellor who liked to dress up consumption as investment.

In 2003, I wrote a piece for the BBC, warning of the debt trap: “British consumers are living in a never-never land of very high personal borrowings. They simply cannot carry on spending more than they are earning without a hard landing.”

As the borrowing binge went on, Britain’s savings ratio fell below zero in the final quarter of 2007, at which point consumers were spending more than they were earning. They had become spellbound by Mr Brown’s voodoo economics – a weird belief in the magic of profligacy.
The upshot was a growth model that required shoppers to exhaust all available supplies of credit – and then find some new ones. Maximum spending first became the norm and then the minimum. Saving was for mugs, or so we were told.

The housing market, too, relied on hocus-pocus. When a chasm opened up between average house prices (2006: £200,000) and average salaries (£25,000), it was filled with “creative solutions”, ie, loans greater than the value of the properties. Borrowers were covered, but only by a diaphanous veil of sorcery.

The 2008 credit crunch stripped them bare, forcing monetary authorities to take unprecedented action on interest rates. With its base rate down to 0.5%, the Bank of England has bought time for overstretched consumers. It has postponed their day of reckoning but, as the governor, Sir Mervyn King, pointed out recently, “the underlying problems of excessive debt have not gone away”.

http://www.telegraph.co.uk/finance/comment/jeffrandall/8859082/The-debt-trap-time-bomb.html

Graham_Devon

wotsthat wrote: »

Well you could do that.

You'd have £200k to buy another house and be the best part of £400/ month better off too, probably lower council tax banding and utility costs. I think some call it downsizing.

And the entire country could do that, could they?

RenovationMan

Graham_Devon wrote: »

And the entire country could do that, could they?

The entire country isn't indebted. Of those who are indebted (myself included) the vast majority are more than able to meet their repayments. Of the few that are going under then the option exists for some of them to sell up, pay off debts and rent until their financial circumstances turn around. For those who have no assets, then the option exists for them to go bankrupt. Thus it has always been.

Christ, it's not rocket science is it?

the_flying_pig

Thrugelmir wrote: »

Good piece from Jeff Randall in yesterdays Telegraph.




http://www.telegraph.co.uk/finance/comment/jeffrandall/8859082/The-debt-trap-time-bomb.html

yeah, I guess they're going for balance - the [business] editor writes a bearish piece, his deputy writes a slightly tongue-in-cheek bullish one to sit side by side with it.

both would benefit from some sensible comparators, i.e. how does our level of household debt [relative to income] compare with what it used to be, or with other countries [a decent sample rather than a couple of cherry picked basket cases]

Hamish's blathering about housing equidee ignores the obvious, namely that [actually there's no point].

wotsthat

Graham_Devon wrote: »

And the entire country could do that, could they?

No but the person in your example could...

Originally Posted by Graham_Devon
So if my house is worth 300k, and I owe 100k on an interest only, or even repayment mortgage.

Are you saying I can just sell the house, and then I will have money, but no where to live?

This seems, well, rather stupid.

I never said you said that the entire country could do that. Why are you suggesting I said that you said that?;)

Joe_Bloggs

From the same Jeff Randall article the Office of 'Budget Responsibility' expect this:-

According to the OBR. UK personal debt will grow by nearly 50 per cent between now and the end of this parliament.

The OBR need to account for a source of increased GDP to lend their predictions credibility, hence we will all borrow 50% more by 2014.

J_B.

Kennyboy66

Thrugelmir wrote: »

Good piece from Jeff Randall in yesterdays Telegraph.




http://www.telegraph.co.uk/finance/comment/jeffrandall/8859082/The-debt-trap-time-bomb.html

You could have said most of that about the late 1980's Lawson boom.

Obviously savings rates didn't fall as far to go negative then, unsercured debt wasn't as high - but by a fair few metrics house prices were even more stratospheric, and the amount households had to spend servicing debt was eye watering.

RenovationMan

wotsthat wrote: »

No but the person in your example could...



I never said you said that the entire country could do that. Why are you suggesting I said that you said that?;)

I think Graham realised the spuriousness of that argument and quickly tried to change the parameters. All Graham did with his example is to help prove Hamish's point. GD's test case could sell his house even for 'fire sale' amounts, pay off his debt and go into rented accomodation with debt free status and enough money left from the house sale to use as a substantial deposit on a new home when his personal circumstances changed. No different really from the many prospective FTBers on here.

Thrugelmir

Kennyboy66 wrote: »

You could have said most of that about the late 1980's Lawson boom.

Obviously savings rates didn't fall as far to go negative then, unsercured debt wasn't as high - but by a fair few metrics house prices were even more stratospheric, and the amount households had to spend servicing debt was eye watering.

Different economy back then, computer technology was still in its infancy. Now more people are employed in the retail sector than manufacturing for example. As (you've pointed out) the OBR forecasts are dependent on personal consumption. So to rebalance the economy while deleveraging at the same time may well be a tortuous process.

Graham_Devon

RenovationMan wrote: »

The entire country isn't indebted. Of those who are indebted (myself included) the vast majority are more than able to meet their repayments. Of the few that are going under then the option exists for some of them to sell up, pay off debts and rent until their financial circumstances turn around. For those who have no assets, then the option exists for them to go bankrupt. Thus it has always been.

Christ, it's not rocket science is it?

It's not rocket science, but it's the whole point of Hamish's thread.

Even he appears to have left after figuring out he doesn;t really know what he's trying to say!