We can also see from the table the significance of the value of non-financial assets to net worth. The value of households’ physical wealth is slightly larger than the value of its financial assets, though in 2011 both equate to around 4¼ times the annual flow of disposable income.
2011 saw the value of the stock of non-financial wealth grow by 0.7 per cent while the value of the sector’s stock of financial assets fell by 0.4 per cent. Meanwhile, the value of the stock of financial liabilities was virtually unchanged at a little over £1½ trillion. In 2011, the sector’s financial liabilities were equivalent to around 1½ times its annual disposable income. While this is down from the 2007 peak of 1¾ times income, it is considerably higher than during the period from 1987 to 1999 when the financial liabilities to income ratio remained consistently close to 1. The 2000s saw a rapid expansion of the sector’s liabilities relative to its income and, hence, today there remains what economists call a debt overhang.
Despite the very small overall increase in net worth in 2011, the stock of net wealth was up by 18 per cent on 2008. During 2008, net worth fell by 12 per cent. This was on the back of a fall in non-financial wealth of 9.4 per cent, a fall in the value of financial assets of 10.1 per cent and an increase in the value of financial liabilities of 1.9 per cent.
Chart 1 gives an historical picture of net worth. It shows the two principal balances that comprise net worth: net financial wealth and physical wealth. Each is shown relative to annual disposable income. Again, we can see the importance of physical wealth to overall net worth. The growth in house prices from the late 1990s through to the economic downturn of the late 2000s helps to explain its rising relative importance in net worth. We can also see from the chart that the relative level of net worth is roughly on a par with its value at the end of the 1990s. However, the composition is different. Today, relatively more of the sector’s net worth comes from non-financial wealth compared with that from net financial wealth.
A crucial question for spending in the months ahead is how inclined the household sector feels to consolidate its balance sheets further. Chart 2 includes more recently available data on financial assets and liabilities from United Kingdom Economic Accounts, Q3 2012. From it we can see the declining stock of financial liabilities relative to disposable income. This has been driven by an actual fall in the stock of unsecured financial liabilities. In the 12-month period up to the end of Q3 2012, the stock of unsecured financial liabilities fell by 6.4 per cent (the stock of secured debt rose by 1.8 per cent). This consolidation of unsecured debt suggests that households remain understandably cautious given the uncertain economic environment. Hence, the household balance sheet will most probably continue to constrain consumption growth in the short-term.
The UK and US governments face a conundrum. To achieve economic recovery, aggregate demand needs to expand. This means that one or more of consumption, government expenditure, exports and investment must rise. But the government is trying to reduce government expenditure in order to reduce the size of the public-sector deficit and debt; exports are being held back by the slow recovery, or even return to recession, in the eurozone and the USA; and investment is being dampened by business pessimism. This leaves consumer expenditure. For recovery, High Street spending needs to rise.
But herein lies the dilemma. For consumer spending to rise, people need to save less and/or borrow more. But UK and US saving rates are already much lower than in many other countries. You can see this by examining Table 23 in OECD Economic Outlook. Also, household debt is much higher in the UK and USA. This has been largely the result of the ready availability of credit through credit cards and other means. The government is keen to encourage people to save more and to reduce their reliance on debt – in other words, to start paying off their credit-card and other debt. That way, the government hopes, the economy will become ‘rebalanced’. But this rebalancing, in the short run at least, will dampen aggregate demand. And that will hardly help recovery!
In the following podcast, Sheldon Garon discusses his new book Beyond Our Means. He describes the decline of saving in the USA and UK and examines why other countries have had much higher saving rates.
‘He also seeks to explain why high interest rates didn’t encourage saving in the boom years and why current levels of relatively high inflation haven’t stopped savings rates shooting up again in Britain.’
Living beyond our means Guardian: the Business Podcast, Sheldon Garon talks to Tom Clark (2/11/11)
- Why have saving rates in the UK and USA been much lower than those in many other countries? How significant has been the availability of credit in determining savings rates?
- Why have saving rates increased in the UK and USA since 2008/9 despite negative real interest rates in many months?
- Explain what is meant by the “paradox of thrift”. What are the implications of this paradox for government policy at the present time?
- Why may it be difficult to have a consumer-led recovery in the UK and US economies?
- What is the life-cycle theory of consumption and saving? How well does it explain saving rates?
- Can people be given a “nudge” to spend more or to save more? If so, what nudges might be appropriate in the current situation?
- Why do countries with a more equal distribution of income have higher saving rates?
- What is the relationship between the saving rate and (a) the rate of inflation and (b) the real rate of interest? Why is this the case?
Each month the Bank of England reports on the amount of net lending by households. This is the amount that households have borrowed from financial institutions (gross lending) less any repayments households have made to financial institutions. In March, net lending to households was £643 million, down from £2.43 billion in February. Of the £643 million, £318 million was net secured lending (i.e. mortgage lending) and £325 million net unsecured lending (i.e. lending through credit cards, overdrafts and general loans).
Now, you might think that net lending of £643 million means that the stock of debt owed by households grew by £643 million. Well, not quite; some debt is ‘written off’ by financial institutions. When bad debts are taken into consideration we find that the stock of debt actually fell in March by £2.682 billion to stand at £1.460 trillion. Of this stock of debt, £1.239 trillion is secured debt and £221.65 billion is unsecured debt. Put another way, 84% of household debt is secured debt and 16% unsecured debt.
One of the interesting developments of late has been the decline in the household sector’s stock of unsecured debt. It has now fallen for 10 months in a row and in 16 of the last 18 months. Interestingly, in only 7 of these months was net unsecured lending actually negative. However, historically low sums of net unsecured lending combined with the writing-off of unsecured debt has meant that the stock of unsecured debt has fallen by £14.975 billion over the past 18 months. Over the same period the total stock of debt increased by £2.379 billion.
Patterns in net lending by households and in the growth of the stock of household debt reflect, on one hand, the willingness and ability of lenders to supply credit and, on the other hand, the demand by households for credit. On the supply-side, the financial crisis continues to restrict lending by financial institutions. But demand has been affected too because households as well as banks are looking to rebuild their balance sheets. Furthermore, the economic downturn, lower asset prices, including, until of late, lower house prices, as well as a sense of economic uncertainty have all contributed to a more precautionary mind-set amongst households.
This precautionary mind-set has impacted on the housing market. Housing market activity can, at best, be described as ‘thin’. Even though the seasonally-adjusted number of mortgage approvals for house purchase rose by 4.3% in March to 48,901, this is almost half the 94,043 seen on average each month over the past ten years. A further demonstration of the household sector’s precautionary behaviour is the sector using housing as a vehicle for saving. We observed in our blog article Saving through housing: households build firmer foundations that since the second quarter of 2008 additional housing investment (i.e. money spent on moving costs, including stamp duty, the purchase of newly built properties or expenditure on major home improvements) has been greater than net secured lending. This is known as negative housing equity withdrawal (HEW). In other words, the household sector’s stock of secured borrowing has increased by less than we would have expected.
In the 12 months to the end of March, the stock of secured debt rose by only 0.9% compared with an average annual growth rate of 9.8% over the past 10 years. Of course this doesn’t mean that households have simply been using some of their own money to fund housing investment, but that they have also been paying-off some of their existing secured debt. This, coupled with the 4.3% decline in the stock of unsecured debt, demonstrates the extent to which the household sector has been looking to consolidate. It would be something of a surprise if this consolidation was to stop any time soon.
Weak mortgage lending set to undermine house prices Independent, David Prosser (5/5/10)
Mortgage lending down almost 90% from 2007 peak Guardian, Katie Allen (4/5/10)
Mortgage approvals still sluggish, figures show BBC News (4/5/10)
Mortgage lending stalls this year Telegraph, Harry Wallop (4/5/10)
Lending dip fuels house price fall fears Press Association (4/5/10)
Lending to individuals Bank of England
Monetary and Financial Statistics (Bankstats) Bank of England (See Tables A5.1 to A5.7, in particular)
Housing equity withdrawal (HEW) statistical releases Bank of England
- What do you understand by the term net lending? What would a negative net lending figure indicate?
- Illustrate with examples what you understand by secured and unsecured debt.
- What factors might explain why the household sector’s net secured lending has been less than the amount of its housing investment (e.g. the household sector’s purchase of new houses or its spending on major refurbishments)? Does this mean that stock of secured lending has been falling?
- What factors might explain the recent historically low levels of net unsecured lending?
- Does net lending have to be negative for the stock of debt to fall? Explain your answer.
- As well as the household sector, which other sectors might need to rebuild their balance sheets? How might such behaviour be expected to impact on the economy?
Latest figures from the Bank of England show that the stock of personal debt has fallen for the first time since the Bank began recording the figures in 1993 (search for table LPMVTUV in the Bank of England’s Statistical Interactive Database). So why are people on average paying back more than they are borrowing and what will be the implications for the economy? The following articles look at the issues.
Record decline in UK lending threatens recovery Financial Times (1/9/09)
Britons’ mortgage repayments outstrip new loans Times Online (1/9/09)
Personal debt dips for first time BBC News (1/9/09)
Mortgage approvals rise again but repayments outstrip lending Guardian (1/9/09)
Exceptional times BBC, Stephanomics (2/9/09)
Personal debt falls BBC Today Programme (2/9/09)
UK personal debt levels fall (video) BBC News (2/9/09
For the July data from the Bank of England see:
Lending to Individuals: July 2009
and for later periods, if you access this news item after September 2009, see:
Lending to Individuals: latest
- What is the effect on aggregate demand of a net repayment of debt by individuals? What other information would you need to have in order to calculate whether aggregate demand is rising or falling?
- Use the Excel data from the Bank of England’s Statistical Interactive Database (linked above in the introduction to this news item) to trace the credit crunch.
- For what reasons have individuals switched from net accumulation of debt to net repayment of debt? Does this suggest that the fall in interest rates over the past 12 months has had a perverse effect?
- What factors have been determining personal saving and borrowing since the start of the credit crunch?
- What are the short-term and long-term implications of a reduction in personal debt?