I found myself singing this morning which I have to admit is not the most pleasant experience for those in ear-shot. I was singing to the tune of ‘love is all around us’. But rather than the words of the song performed by the Troggs in the late 1960s and by Wet Wet Wet in the 1990s, I found myself singing ‘debt is all around us’. It could easily have been the sub-conscious effect of the headlines relating to government debt (also known as national debt). But, actually it was the effect of having looked at my latest credit card statement and noting the impact that my summer holiday had had on my financial position! Relaxation, so it seems, doesn’t come cheap. With this in mind, I have just taken a look at the latest bank of England figures on British household debt. You can do the same by going to the Bank of England’s statistical release lending to individuals.
The latest figures reveal that at the end of June 2011 households in Britain had a stock of debt of £1.451 trillion. Now this is a big number – not far short of the economy’s annual Gross Domestic Product. But, interestingly, this is its lowest level in three years. Indeed, over the past twelve months the stock of household debt has fallen by £6 billion. This is the result of the sector’s repayment of unsecured debt, such as credit card debt and overdrafts. The stock of unsecured debt has fallen by £8.2 billion or 3.8% over the past year to stand at £209.7 billion.
The remaining £1.241 trillion of household debt is secured debt which is debt secured against property. The stock of secured debt has risen by £2.16 billion over the last 12 months, but this equates to a rise of less than 0.2%. In fact, further evidence from the Bank of England reveals that households are not only looking to reduce their exposure to unsecured debt but to pay off mortgage debt too. You might wonder how this might be occurring given that the stock of mortgage debt has risen, albeit only slightly. The answer lies in the growth of housing investment relative to that of mortgage debt. Housing investment relates, in the main, to the purchase of brand new homes and to major home improvements. As our population grows and the housing stock expands and as we spend money on improving our existing housing stock we acquire more mortgage debt. Bank of England figures show that housing investment has been greater than new secured lending. Consequently, the additions to the stock of lending have been less than housing investment. This gives rise to negative housing equity withdrawal, i.e. negative HEW.
The Bank of England estimates that in Q1 of 2011 there was an increase in housing equity of £5.8 billion. Negative housing equity withdrawal (HEW), an injection of housing equity, has occurred every quarter since Q2 2008. Since then, the UK household sector has injected some £63.7 billion of housing equity. The opportunity cost of this injection is that by increasing equity in property households are using money that could have been used for consumption or for purchasing financial assets. The extent of this negative HEW over the past 12 quarters has been the equivalent to 2.2% of disposable income.
While my credit card may have ballooned this month, it would appear that the household sector is looking to reduce its debt exposure. I will be looking to do likewise!
Articles
Housing injection goes on BBC News (4/7/11)
Personal insolvencies rise Independent, Philip Whiterow (5/8/11)
Mortgage boom as homeowners cash in an try reduce debts Independent, Simeon Read (5/7/11)
Homeowners inject £5.8 billion of equity into property in first quarter Telegraph, Emma Rowley (5/7/11)
Housing equity injection continues Guardian, Hilary Osborne (4/7/11)
Data
Lending to individuals statistical release Bank of England
Housing equity withdrawal (HEW) statistical release Bank of England
Questions
- Illustrate with examples what is meant by secured and unsecured debt.
- What factors might help to explain the longer-term growth in secured and unsecured debt over recent decades?
- What factors might help to explain the more recent patterns in secured and unsecured debt?
- What do you understand by the term housing equity withdrawal?
- What is meant by negative HEW?
- What factors might help to explain the negative HEW observed for the past twelve quarters?
- What implications might there be for economic growth of negative housing equity withdrawal (HEW)?
Friday 5 August 2011 saw the end of a very bad fortnight for stock markets around the world. In Japan the Nikkei 225 had fallen by 8.2%, in the USA the Dow Jones had fallen by 9.8%, in the UK the FTSE 100 was down 11.6% and in Germany the Dax was down 14.9%. In the first five days of August alone, £148 billion had been wiped off the value of the shares of the FTSE 100 companies and $2.5 trillion off the value of shares worldwide.
But why had this happened and what are likely to be the consequences?
The falls have been caused by the growing concerns of investors about the health of the global economy and the global financial system. There are worries that the European leaders at their summit on 21 July did not do enough to prevent the default of large countries such as Spain and Italy. There are concerns that the US political system, following the squabbling in Congress over raising the sovereign debt ceiling for the country, may not be up to dealing with the country’s huge debts. Indeed, the rating agency, Standard & Poor’s, downgraded the USA’s credit rating from AAA to AA+. This is the first time that the USA has not had top rating.
Then there are worries about the general slowing down of the world economy and how this will compound the problem of sovereign debt as it hits tax revenues and makes it harder to reduce social security payments. Underlying all this is the fear that the problem of indebtedness that contributed to the banking crisis of 2007/8 has not gone away; it has simply been transferred from banks to governments. As Robert Peston states in his article, linked to below:
The overall volume of indebtedness in the economy is therefore still with us – although it has been shuffled from financial sector to public sector.
And if you took the view four years ago that the quantum of debt in the system was unsustainably large, then you would argue that by propping up the banks, the day of reckoning was being postponed, not cancelled.
… just like the awakening in 2007 to the idea that many of the housing loans and associated financial products were worthless, so there is a growing fear that a number of financially overstretched governments, especially in the eurozone, will not be able to repay their debts in full.
Which brings us to the consequences. Key to the answer is confidence. If governments can reassure markets over the coming days and weeks that they have credible policies to support highly indebted countries in the short term and to sustain demand in the global economy (e.g. through further quantitative easing in the USA (QE3)); and if they can also reassure markets that they have tough and credible policies to reduce their debts over the longer term, then confidence may return. But it will not be an easy task to get the balance right between sustaining recovery in the short term and fiscal retrenchment over the long term. Meanwhile consumers are likely to become even more cautious about spending – hardly the recipe for recovery.
Videos
Markets turmoil: What you need to know BBC News, Jonty Bloom (5/8/11)
Turmoil on stock markets persists as share prices fall BBC News, Robert Peston (5/8/11)
Global stock market crash – video analysis Guardian, Larry Elliott and Cameron Robertson (5/8/11)
S&P downgrade US AAA credit rating BBC News, Marcus George (6/8/11)
U.S. loses AAA credit rating Reuters, Paul Chapman (6/8/11)
U.S. loses AAA credit rating from S&P CNN (5/8/11)
US loses AAA rating ITN (6/8/11)
Shares slump amid euro fears Channel 4 News, Faisal Islam (4/8/11)
What triggered the turmoil? Financial Times, Sarah O’Connor and Edward Hadas (5/8/11)
Fears eurozone woes will spread BBC News, Stephanie Flanders (5/8/11)
Articles
FTSE 100 tumbles in worst week since height of the crisis The Telegraph, Richard Blackden (5/8/11)
Global recession fears as stock markets tumble to nine-month low The Telegraph, Alistair Osborne (3/8/11)
Global markets on the brink of crisis Guardian, Larry Elliott (5/8/11)
A week of financial turmoil: interactive Guardian, Nick Fletcher, Paddy Allen and James Ball (5/8/11)
Turmoil on stock markets persists BBC News (5/8/11)
Bank worries bring echoes of 2008 BBC News, Stephanie Flanders (5/8/11)
The origins of today’s market mayhem BBC News, Robert Peston (5/8/11)
Time for a double dip? The Economist (6/8/11)
Rearranging the deckchairs The Economist (6/8/11)
High hopes, low returns The Economist (4/8/11)
The debt-ceiling deal: No thanks to anyone The Economist (6/8/11)
Six years into a lost decade The Economist (6/8/11)
Debt crisis Q&A: what you need to know about Standard & Poor’s credit rating The Telegraph, Richard Tyler (6/8/11)
U.S. Will Roll Out QE3 After S&P Rating Cut, Li Daokui Says Bloomberg (6/8/11)
China flays U.S. over credit rating downgrade Reuters, Walter Brandimarte and Gavin Jones (6/8/11)
US credit rating downgraded to AA+ by Standard & Poor’s Guardian, Larry Elliott, Jill Treanor and Dominic Rushe (5/8/11)
Reaction to the US credit rating downgrade Guardian (6/8/11)
Market turmoil and the economics of self-harm Guardian, Mark Weisbrot (5/8/11)
Week ahead: Markets will sort through credit downgrade Moneycontrol (6/8/11)
S&P Statement
S&P statement on lowering US long-term debt to AA+ Guardian (6/8/11)
Stock market indices
FTSE 100: historical prices, 1984 to current day Yahoo Finance
Dow Jones Industrial Average: historical prices, 1928 to current day Yahoo Finance
Nikkei 225 (Japan): historical prices, 1984 to current day Yahoo Finance
DAX (Germany): historical prices, 1990 to current day Yahoo Finance
CAC 40 (France): historical prices, 1990 to current day Yahoo Finance
Hang Seng (Hong Kong): historical prices, 1986 to current day Yahoo Finance
SSE Composite (China: Shanghai): historical prices, 2000 to current day Yahoo Finance
BSE Sensex (India): historical prices, 1997 to current day Yahoo Finance
Stock markets BBC
Questions
- Why have share prices been falling?
- Does the fall reflect ‘rational’ behaviour on the part of investors? Explain.
- Why does ‘overshooting’ sometimes occur in share price movements?
- Why has the USA’s credit rating been downgraded by Standard & Poor’s? What are the likely implications for the USA and the global economy of this downgrading?
- How is the downgrading likely to affect the return on (a) existing US government bonds; (b) new US government bonds?
- Why might worries about the strength of the global recovery jeopardise that recovery?
- To what extent has the debt problem simply been transferred from banks to governments? What should governments do about it in the short term?
There is no bigger purchase than a house. Ask most individuals who have at some point in their life purchased a house and they will tell you about the considerable time they devoted to making the decision to purchase. It’s not like rushing to a supermarket and purchasing a kilo of sugar. The decision to purchase a property is not taken lightly: the mood music has to be right. Consumer confidence is therefore an important ingredient for an active housing market. The latest mortgage approval data from the Bank of England suggest the music is not right!
April’s mortgage approval numbers continue to demonstrate the on-going fragility of the UK housing market and, in turn, of British households. April saw 45,166 mortgages approved for house purchase. What makes this figure particularly noteworthy is that it is the lowest level recorded in the month of April since the Bank of England figures started back in 1993. It is also 9% lower than April 2010. Some commentators have argued that the number of public holidays in April contributed to the fall in activity. But, 138,756 approvals over the period from February to April was 4.3% lower than over the corresponding period last year. This would suggest that we can’t lay the blame for low levels of mortgage approvals solely on hot cross buns and Kate Middleton!
The weakness in mortgage approvals data has been regular news for some time. Over the past two years the number of approvals per month has been close to 50K compared to about 89K over the past ten years. What makes the latest figures troubling is that there is no indication of recovery any time soon. Rather, the figures show that housing demand may be weakening yet again. If we exclude December’s low of 42,772, when housing market activity was hit by the harsh winter conditions, April’s figure is the lowest since March 2009.
The weakness in the demand for housing can in large part be attributed to the poor mood music: economic growth remains fragile, average real incomes have been declining and unemployment levels are expected to rise over the coming months. Furthermore, households are naturally reluctant to purchase property is they think house prices may fall further. All in all, we can expect the weakness in housing demand to persist for some time. The question seems to be one of just how weak housing demand will be. The next few months promise to be very interesting to say the least. Keep listening to the music!
Articles
UK mortgage approvals hit record low in April Telegraph, Emma Rowley and Harry Wilson (2/6/11)
Mortgage approvals fall to record April low Guardian, Mark King (1/6/11)
Mortgage approvals fall to two-year low Financial Times, Norma Cohen (1/6/11)
Mortgage approvals hit new low, Bank of England reports BBC News (1/6/11)
UK mortgage approvals drop to lowest in four months on lower confidence Bloomberg, Scott Hamilton (1/6/11) )
Pound drops on weak UK manufacturing PMI and mortgage approvals data RTT News (6/1/11)
Data
Mortgage approval numbers and other lending data are available from the Bank of England’s statistics publication, Monetary and Financial Statistics (Bankstats) (See Table A5.4.)
Questions
- How sensitive do you think mortgage approval numbers are likely to be both current and future economic conditions?
- Are there any other types of purchases which households make which you might expect to be especially sensitive to economic conditions?
- Is it just the weakness in the demand for housing which explains the current low levels of mortgage approvals? Explain your answer
- Do weak mortgage approval numbers mean that we should expect house prices to fall in the months ahead? Use demand and supply diagrams to help explain your answer.
While inflation is a concern in the UK and is making the Bank of England think twice about keeping interest rates at their all time low of 0.5%, inflation in Japan is being celebrated. The Japanese economy has been plagued by deflation for over a decade and for the past 2 years inflation has never been above 0%. However, in April the consumer price index (CPI) rose to 0.6% from the previous year, fuelled by petrol prices. Strangely it might be the Japanese earthquake and tsunami that helped this situation, as Japan was unable to generate sufficient electricity and hence had to import fuel from abroad.
A typical question from non-economists is always about why deflation and hence falling prices is such a bad thing. Surely, it’s great for consumers? For those shopping for bargains, perhaps it is helpful – after all, if prices fall, a consumer’s real income will be higher. However, the problem with falling prices is that people start to hold off buying. If you want to buy a car, but expect prices to be lower next month, then it’s a rational decision to delay your purchase until next month when prices are lower. However, next month, you still expect prices to be lower in the following month and so delay purchasing again. And so the process continues. When people expect prices to fall they put off their purchases, this reduces demand and so prices do indeed fall. There are also costs for businesses: as consumers delay buying, sales begin to fall. And businesses are also consumers, and so they start delaying their purchases of inputs.
While many central banks across the world have begun to tighten monetary policy, the Japanese central bank seems inclined to keep monetary policy loose and has even considered expanding the emergency lending programme. As Azusa Kato, an economist at BNP Paribas, said:
“The bank will probably add stimulus if it sees more signs of weakening demand”. “If you strip out energy and food costs, consumer prices are basically flat now.”
Despite this inflationary pressure, many believe that it is unlikely to continue and deflationary pressures may appear once again in the near future. The following articles consider the Japanese deflationary situation.
Articles
Japan ends 25 months of deflation Bloomberg, Mayumi Otsuma (27/5/11)
Japan consumer prices log first rise in 28 months Associated Press (27/5/11)
Japan beats deflation for the first time in two years BBC News (275/11)
Japan overcomes deflation for first time in two years Guardian, Julia Kollewe (27/5/11)
Japanese consumer price rise (including video) BBC News (27/5/11)
Japan April core CPI rises 0.6 pct yr/yr Reuters (26/5/11)
Japan experiences inflation for first time in over two years Telegraph (27/5/11)
Data
Japan Inflation Rate Trading Economics
Consumer Price Index (Japan) Japanese Statistics Bureau
Inflation Rate and Consumer Price Index (CPI) (for USA, Canada, Australia, UK and Japan) Rate Inflation
Statistical Annex, Preliminary Version OECD
Questions
- What are the main costs of deflation? Think about the wider effects on consumers, businesses and the government.
- What has caused the increase in inflation to 0.6% in Japan and why was there an expectation that inflation would re-appear?
- What explanation can be given for the belief that deflation will soon re-emerge?
- Using a demand and supply diagram, explain the process by which consumers delaying their consumption will lead to prices falling continuously.
- What is the best policy for the Japanese central bank to pursue in light of the new data?
Each month the Bank of England releases figures on the amount of net lending to households. Net lending measures the additional amount of debt acquired by households in the month and so takes into account the amount of debt that households repay over the month. For some time now, the levels of net lending have been remarkably low. Over the first quarter of 2011, monthly net lending to households averaged £1.2 billion. This might sound like a lot of money and in many ways this is true. But, to put the weakness of this figure into perspective, the monthly average over the past ten years is £7 billion.
Household debt can be categorised as either secured debt or unsecured debt. The former is mortgage debt while the latter includes outstanding amounts due on credit and store cards, overdrafts and personal loans. Levels of net secured lending have averaged £1 billion per month over the first 3 months of 2011. This compares with a 10-year average of £5.8 billion per month. Levels of net unsecured lending have averaged £196 million per month over the first 3 months of 2011. This compares with a 10-year average of £1.2 billion per month. In 12 of the months between December 2008 and January 2011 net unsecured lending was actually negative. This means that the value of repayments was greater than new unsecured lending. Once bad debts are taken into account we observe from the autumn of 2008 almost persistent monthly falls in the stock of unsecured debt.
Weak levels of net lending reflect two significant factors. First, on the supply-side, lending levels remain constrained and credit criteria tight. Second, on the demand-side, households remain anxious during these incredibly uncertain times and would appear to have a very limited appetite for taking on additional credit.
Finally, a note on the stock of debt that we households collectively hold. The stock of household debt at the end of March 2011 was £1.45 trillion. This is £7.2 billion or 0.5% lower than in March 2010. The stock of secured debt has risen over this period by only £2.6 billion or 0.2%, while unsecured debt – also known as consumer credit – has fallen £9.9 billion or 4.5%. These figures help to reinforce the message that British households continue to consolidate their financial positions.
Articles
Latest data shows UK economy still sluggish Euronews (4/5/11)
Bank reveals weal lending on mortgages City A.M., Julian Harris (5/5/11)
Mortgage lending plummets by 60% Belfast Telegraph (5/5/11)
Mortgage lending down as borrowers repay debt thisismoney.co.uk (4/5/11)
Average UK household owes more than £50,000 in debts Mirror, Tricia Phillips (6/5/11)
Data
Lending data are available from the Bank of England’s statistics publication, Monetary and Financial Statistics (Bankstats) (See Tables A5.2-A5.7).
Questions
- What is the difference between gross lending and net lending?
- What do you understand by a negative net lending number?
- What is the difference between net secured lending and net unsecured lending?
- What factors do you think help to explain the recent weakness in net lending?
- How would you expect the net lending figures in a year’s time to compare with those now?
- As of 31 March 2011, UK households had accumulated a stock of debt of £1.45 trillion. In what ways could we put this figure into context? Should we as economists be concerned?
- It is said that households are consolidating their financial position. What do you understand by this term and what factors have driven this consolidation?
- What are the implications for the wider economy of households consolidating their financial position?