Have you ever woken in the night worrying about your finances? Most of us have. Our overall financial position undoubtedly exerts influence on our spending. Therefore, we would not expect our current spending levels to be entirely determined by our current income level.
Our financial health, or what economists call our net financial wealth, can be calculated as the difference between our financial assets (savings) and our financial liabilities (debt). Between them, British households have amassed a stock of debt of £1.423 trillion, almost as much as annual GDP, which is around £1.5 trillion (click here to download the PowerPoint.) We look here at recent trends in loans by financial institutions to British households. We consider the effect that the financial crisis and the appetite of individuals for lending is having on the debt numbers.
There are two types of lending to individuals. The first is secured debt and refers to loans against property. In other words, secured debt is just another name for mortgage debt. The second type of lending is referred to as unsecured debt. This covers all other forms of loans involving financial institutions, including overdrafts, outstanding credit card debt and personal loans. The latest figures from the Bank of England’s Money and Credit show that as of 31 March 2013, the stock of debt owed by individuals in the UK (excluding loans involving the Student Loans Company) was £1.423 trillion. Of this, £1.265 trillion was secured debt while the remaining £157.593 billion was unsecured debt. From this, we can the significance of secured debt. It comprises 89 per cent of the stock of outstanding debt to individuals. The remaining 11 per cent is unsecured debt.
The second chart shows the growth in the stock of debt owed by individuals (click here to download the PowerPoint chart). In January 1994 the stock of secured debt stood at £358.75 billion and the stock of unsecured debt at £53.774 billion. 87 per cent of debt then was secured debt and, hence, little different to today. The total stock of debt has grown by 246 per cent between January 1994 and March 2013. Unsecured debt has grown by 197 per cent while secured debt has grown by 253 per cent.
However, more recently we see a different picture evolving, more especially in unsecured debt. Since October 2008, the monthly series of the stock of unsecured debt has fallen on 47 occasions and risen on only 7 occasions. In contrast, the stock of secured debt has fallen on only 12 occasions and often by very small amounts. Consequently, the stock of unsecured debt has fallen by 23.2 per cent between October 2008 and March 2013. In contrast, the stock of secured debt has risen by 3.5 per cent. The total stock of debt has fallen by 0.4 per cent over this period.
Another way of looking at changes in the stock of debt is to focus on what are known as net lending figures. This is simply the difference between the gross amount lent in a period and the amount repaid. The net lending figures will, of course, mirror changes in the total debt stock closely. For example, a negative net lending figure means that repayments are greater than gross lending. This will translate into a fall in the stock of debt. However, some difference occurs when debts have to be written off and not repaid.
The third chart shows net lending figures since January 1994 (click here to download the PowerPoint chart). The chart captures the financial crisis very nicely. We can readily see a collapse of net lending by financial institutions to households. It is, of course, difficult to disentangle from the net lending figures those changes driven by changes in the supply of credit by financial institutions and those from changes in the demand for credit by individuals. But, we can be certain that the enormous change in credit levels in 2008 were driven by a massive reduction in the provision of credit.
To further put the net lending figures into context, consider the following numbers. Over the period from January 2000 to December 2007, the average amount of monthly net lending was £8.52 billion. In contrast, since January 2009 the average amount of net lending has been £691 million per month. Consider too the composition of this net lending. The average amount of net secured lending between January 2000 and December 2007 was £7.13 billion per month compared with £1.39 billion for net unsecured lending. Since January 2009, monthly net secured lending has averaged only £756 million while monthly net unsecured lending has averaged -£64.4 million. Therefore, repayments of unsecured lending have outstripped gross unsecured lending.
While further analysis is needed to fully understand the drivers of the net lending figures, it is, nonetheless, clear that the financial system of 2013 is very different to that prior to the financial crisis. This change is affecting the growth of the debt stock of households. This is most obviously the case with unsecured debt. The stock of unsecured debt in March 2013 is 24 per cent smaller than in its peak in September 2008. It is now the job of economists to understand the implications of how the new emerging patterns in household debt will affect our behaviour and overall economic activity.
Bank of England extends lending scheme Financial Times, Chris Giles (24/4/13)
Markets insight: Europe and the US lines cross on household debt ratio Financial Times, Gillian Tett (9/5/13)
British families are the deepest in debt Telegraph, James Kirkup (14/5/13)
Total property debt of British households stands as £848bn Guardian, Hilary Osborne (13/5/13)
Household finances reach best level in three years – but are stuck below pre-crisis levels This is Money.co.uk, Matt West (17/5/13)
ONS says Welsh households have lowest debts in Britain BBC News (28/1/13)
- Outline the ways in which the financial system could impact on the spending behaviour of households.
- Why might the current level of income not always be the main determinant of a household’s spending?
- How might uncertainty affect spending and saving by households?
- Explain what you understand by net lending to individuals. How does net lending to individuals affect stocks of debt?
- Outline the main patterns seen in the stock of household debt over the past decade and discuss what you consider to be the principal reasons for these patterns.
- If you were updating this blog in a year’s time, how different would you expect the charts to look?