Our personal finances are the worst they’ve ever been
By
Associate Editor
David Stevenson
Sep 02, 2008
We're far too fond of spending money we don't have
The start of September and it's throwing it down. Autumn's on the way already. And come winter, for many people, it could be feeling even more like Bleak House.
Not only is the British economy about to get really nasty, but our personal finances have now fallen into even worse disrepair than at any time in our national history. Which means that the upcoming recession will bite a lot harder, and for a good while longer, than most peoples' worst fears…
UK personal debt mountain has been growing at £254m per day
By the end of July this year, total UK personal borrowing had surged to an eye-watering all-time time high of £1.45 trillion, of which just over £1.2 trillion was mortgage debt, according to the money education charity Credit Action. The overall total has risen £93 bn - almost 7% - over the last 12 months. Another way of looking at it is that the loan mountain has been growing at £254m per day (including Sundays).
Source: Credit Action
In fact personal debt has now pulled well clear of Britain's GDP of just over £1.4 trillion. In other words, the country no longer produces enough each year to pay off what its citizens owe personally, let alone all the debt the government's racking up.
And though the growth in household borrowing has showed signs of slowing, Credit Action tells us that the average debt, including mortgages, has risen to over £30,000 per UK adult. Over the past 12 months the average interest bill paid by each household was some £3,900 – all out of an average wage of less than £25000 per annum, according to National Statistics.
This is where that debt mountain starts to look very menacing. Over the last 15 years personal debt has soared 260%, massively outstripping the growth in average wages of 'just' 75%. That didn't seem too painful when the economy was going well, and of course interest rates are lower these days than they were in 1993. But as we've said at Moneyweek many times, the good times are very much at an end. Now Messrs Mervyn King and Alistair Darling are singing off the same hymn sheet.
Enjoying this article? Sign up for our free daily email, Money Morning, to receive intelligent investment advice every weekday. Sign up to Money Morning.
The cracks are already showing. Citizens Advice Bureaux in England and Wales have seen mortgage arrears problems rocket 35% in the first two months of 2008, compared with 2007. Their overall debt enquiries are up 20% over the twelve months and have more than doubled within the last ten years. The R3 Debt Index shows that 18% of people reckon their borrowings are now out of control and causing them great difficulties. What's more, the proportion of people spending over 30% of their monthly income on unsecured debt repayments has doubled over the past year, says Callcredit research.
Unemployment could hit two million by Christmas
And now that the days of low unemployment are over, those cracks are about to turn into large crevices. And be under no illusions, unemployment is set to take off. The current jobless rate of 1.67m could reach two million by Christmas, warned Danny Blanchflower, a member of the Bank of England's interest-rate setting Monetary Policy Committee, last week.
So bad debts, which have already been climbing since the start of 2008, could really start to accelerate. "The turning point in the household bad debt cycle has already been reached", says Capital Economics. The same will apply to house repossessions, where court orders in the second quarter were already up 24% on last year. Further, KPMG sees bankruptcies rising 10% by year-end. That's one person every five minutes.
No wonder that home loan approvals slumped in July to another record low, a massive 71% lower than a year ago – "yet more very disturbing mortgage data that heighten concerns over the potential depth and length of the housing market correction", says Howard Archer of Global Insight. He's forecasting at least a 30% collapse in house prices from the peak. Meanwhile George Buckley of Deutsche Bank said that mortgage approvals are falling at a far sharper rate than during the early 1990s' housing crash.
You only have to see the pound's all-time low against the euro to see what the world outside thinks of it all. And as for Gordon Brown's much-leaked proposed housing market boost, to be officially confirmed later today, don't get too excited. It won't make much difference.
So is it different this time? The levels of borrowing clearly are. All that debt that seemed such a good idea when it was taken out is now turning into a real millstone. But as we've never seen the like of such borrowing before, the big unknown is how it will all play out.
But I wouldn't be too confident that "things couldn't possibly seem any worse". They can…
Our recommended article for today
Why you should be buying bonds now
Many people think bond-buyers are bonkers. Why buy gilts when inflation is so high? Two reasons. One is a 'flight to quality' away from equities and property. The other is if you believe inflation will soon fall much lower.
Published in Economics
| More articles
by
David Stevenson
FREE - MoneyWeek's daily investment email
Our free daily email, Money Morning, is an informative and enjoyable analysis of what's going on in the markets. Written by our Editor, John Stepek, and guest contributors.
Sign up FREE to Money Morning here.
