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UK household debt set to rise watch

    • Thread Starter

    Most of the discussion about debt recently has been about government debt. However during the last couple of years of the Labour government I remember the Tories making quite a big issue about UK households being the most indebted in the world. The Labour response was usually that the figures are misleading because UK has a high rate of home ownership so obviously homeowners are going to owe a lot more than other European countries where most people rent.

    I remember David Cameron saying at one of the Tory conferences, I think it was either 2009 or 2010, that a Conservative government would build a society "based on saving not on borrowing".

    Now since the Tories have been in power this discussion about household debt seems to have ceased. Now we see why. Last week at the Treasury Select Committee Chuka Umunna brought up a worrying development in the Office for Budget Responsibility's projections. In 2010 UK household debt was £1560bn. When the OBR did its forecasts for Osborne's first budget last year they projected household debt in 2014 to be £1718bn, and government debt to be £1294bn. At last month's budget forecast, they now forecast in 2014 household debt to be £1963bn and government debt to be £1251bn. So they are estimating that government debt will be reduced by £43bn but household debt will rise by £245bn.

    In Paul Krugman's blog on the NY Times website he makes a comment about the UK situation: http://krugman.blogs.nytimes.com/201...ere-and-there/ which sums up what is happening

    Because the only way the economy can avoid taking a hit from government cuts is if private spending rises to fill the gap — and although you rarely hear the austerians admitting this, the only way that can happen is if people take on more debt. So we have the spectacle of a government that inveighs against the evils of debt pinning all its hopes on an assumption that over-indebted households will dig their hole even deeper.
    So we are going to exchange public debt for private debt.

    There will be another effect here. After the last financial crisis a lot of people pointed the finger at the poor in the US who were tempted into taking on mortgages they couldn't afford, by lenders who then just sold on the debt to somebody else who later discovered that the original debtor had defaulted and the debt obligation they'd paid for was worthless. But now because credit has got much tighter, it won't be the poor who are taking on more debt, they won't get access to it.

    It will be the type of people who refer to themselves as the "squeezed middle" ie people on say £30-45k a year who have been trying to live lifestyles slightly above their income and are now facing a squeeze because of the cuts....they will end up taking on the increase in private debt.

    But that creates a political problem in 2015 when the politicians are trying to analyse the problem of "spiralling household debt". All the parties try to position themselves as the party of Middle England, so who will come out and point the finger at the "squeezed middle" for causing the next financial crisis by taking on debt they couldn't afford.

    The poor by and large are used to misery, when there are cuts and so on they complain but nobody listens anyway so they just have to suffer in silence. It is much harder psychologically for Middle England to accept reductions in their lifestyle. If the car breaks down and you can't afford to replace it, a poor family just has to suck it up and get the bus...a middle income family with access to credit, just takes on debt to replace it. I don't say that judgementally its just how people work.

    Really this business of passing debt from private to public and back again is just papering over a problem. In reality we have to accept something we are not likely to....reduced living standards, not just for the poor, but for those higher up the food chain.

    Are they real terms figures?
    • Thread Starter

    I think the figures in the OBR are nominal. Adjusting for real terms is problematic because
    1 - some gilts are index linked some aren't
    2 - some debts eg tracker mortgages are variable rate
    3 - inflation is more likely to push up the BofE rate
    4 - even when the BofE rate is constant, higher inflation can trigger rises in market interest rates

    That said the overall real terms value of the debt will be lower than the nominal figures suggest. But the issue here isn't of the nominal size, its the fact that a contraction of public debt is not going to help us in the long run if there is a greater increase in private debt.

    I can see the seeds of what is going to happen in the future if this increase in private debt happens. Eventually people will start defaulting and lenders will get worried about the scale of indebtedness amongst households so there will be a credit crunch for households. The housing market will fall. That will have a knock on effect on the assets of the banking sector. The banking sector will run into trouble and blame households for living beyond their means. The government will step in to support banking sector and take on its liabilities. Government will then have substantial increases in public debt. The markets will start whispering about sovereign default. The government will get voted out and Labour will talk about about the profligate Coalition government who was reckless with the nations finances.

    i don't quite understand your logic...what is the actual mechanism wherby public debt adds to private debt? a few things though...one thing you should consider is that assets have to match liabilities, and the public/private split is overly simplistic for this discussion. a better way to think about it (and the correct way) is to think about the government, corporate and household balance sheet. if you don't think about it this way, the current situation would appear very confusing. basically, the key is that corporate sector has a massive surplus, the government has a deficit so the consumer is the offsetting factor between these. the problem is corp sector is going to spend from retained earnings and only then will borrow and at that stage the economy will be better. the balance sheet is the correct thing to look at though.

    I would also be careful of extrapolating a situation out. To me, it seems the BOE has shown that it probablly won't raise rates and so the debt situation won't play out like you say. However, this depends on the extent of variable-rate debt holdings by households (which I believe is low). The housing market will eventually fall further though. Either way, consumers can cut back on consumption and that is that. In addition, if your actually reli interested, I would hunt down those household balancesheet numbers (probablly at the ONS) and you should look at the ratio of deposits to total assets. I recently did some work on the US household balance sheet and it turned out this ratio was pretty instructive.

    I agree that UK household debt will increase. Income is being squeezed by inflation due to higher prices for basics like food and fuel and earnings have stayed static or decreased for a lot of people plus redundancies in the public sector with knock on effects of job loses in the private sector. People will have to borrow, withdrawl equity from their homes or use their savings to maintain their standards of living.

    I don't think the housing market will collapse, at least not in London and the south. The reason is inward investment from foriegn investors who like Britain because its politically stable and cheap due to sterling being low against the Euro and US dollar plus a lot of other currencies.

    In the North, houses have gone down in price by a lot because of the North's reliance on the public services for jobs and lack of appeal to foriegn investors.
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