The Debt Mountain

[Guest wrongmove]

UPTB's thread yesterday got mr thinking (Size Of Uk Economy, Quick Question)

In round numbers, UK personal debt is £1T in secured, and £200B in unsecured.

Big numbers !! That is £1,000,000,000,000 in mortgages and £200,000,000,000 in personal loans, credit cards etc.

But the UK GDP is also slightly over £1T - another big number.

So, taking the UK economy as a whole, we have a 1x income mortgage, and about 2 months income in unsecured lending.

Put like that, it doesn't look too bad, on the face of it. If that was me personally, I would be totally unconcerned by the mortgage, but I would be working to reduce the unsecured debt.

Early indications are that consumer appetite for unsecured debt is waning. If this figure drops in real terms, do we really have a lot to worry about as a nation ? I would be very interested in anyones thoughts of how small this number should be to be healthy, in terms of GDP.

[Mr Joe]

Quote "consumer appetite for unsecured debt is waning"

They have probably realised it requires repayment.

Something I do not use but how many of those 0% credit card offers still exist?

Over Xmas a friend told me their £50k house was great and they were glad they bought when they did. In the same breath while excitedly talking about low interest rates, they let slip they had borrowed £40k more when changing their mortgage for a better deal.

The house is worth £120k so their still quids in LOL.

Mr Joe.

[BuyingBear]

UPTB's thread yesterday got mr thinking (Size Of Uk Economy, Quick Question)

In round numbers, UK personal debt is £1T in secured, and £200B in unsecured.

Big numbers !! That is £1,000,000,000,000 in mortgages and £200,000,000,000 in personal loans, credit cards etc.

But the UK GDP is also slightly over £1T - another big number.

So, taking the UK economy as a whole, we have a 1x income mortgage, and about 2 months income in unsecured lending.

But it's not "income" though, at least not in the personal sense, if you added up the collective salaries of the country it will not come to £1T because our GDP includes huge amounts of activity by private companies, banks, the markets, hedging, the public sector, the national debt... this is not take home pay!

The degree of income to debt is also massively unbalanced, it's far from an even spread.

Edited January 8, 2006 by BuyingBear

[Guest wrongmove]

But it's not "income" though, at least not in the personal sense, if you added up the collective salaries of the country it will not come to £1T because our GDP includes huge amounts of activity by private companies, banks, the markets, hedging, the public sector, the national debt... this is not take home pay!

Good point. I estimate that personal income in the form of wages is maybe £26k (mean average wage for full-time worker) x 21M (number of full-time workers http://www.statistics.gov.uk/cci/nugget.asp?id=694) = £550B. Part-time earnings and income from investments etc. needs to be added to this. So the mortgage multiplier is probably nearer 2x, say 1.75x, looked at like this. I agree that this is high, but is it "teetering on the edge of bancrupcy" ?

The degree of income to debt is also massively unbalanced, it's far from an even spread.

This is also obviously true. But I wanted to look at the UK picture as a whole. The UK doesn't need to to worry about a relative few over-indebted nutters if the overall picture is sustainable.

Do you have an opinion on what level of debt would be sensible ? (I'm not convinced that the current level is, I'm just not sure it is disasterous)

[SeenItAllBefore]

This is also obviously true. But I wanted to look at the UK picture as a whole. The UK doesn't need to to worry about a relative few over-indebted nutters if the overall picture is sustainable.

Do you have an opinion on what level of debt would be sensible ? (I'm not convinced that the current level is, I'm just not sure it is disasterous)

Yes it does. If one of those "over indebted nutters" gets repossed in your street the value of your house dives as a result of their forced sale. That's what happend last time and that's what'll happen this time.

[BuyingBear]

Good point. I estimate that personal income in the form of wages is maybe £26k (mean average wage for full-time worker) x 21M (number of full-time workers http://www.statistics.gov.uk/cci/nugget.asp?id=694) = £550B. Part-time earnings and income from investments etc. needs to be added to this. So the mortgage multiplier is probably nearer 2x, say 1.75x, looked at like this. I agree that this is high, but is it "teetering on the edge of bancrupcy" ?

The problem is that debt and interest feeds upon itself, that's how our system sustains itself, paying it down would be deflationary, getting 'rid' would require further debt, which is no escape, that leaves massive inflation and devaluation, which then takes you back to the former.

[Guest wrongmove]

Yes it does. If one of those "over indebted nutters" gets repossed in your street the value of your house dives as a result of their forced sale. That's what happend last time and that's what'll happen this time.

That would be true in a crash scenario, but we are not there yet. Houses are repossesed, even during a boom, but it is no problem to find buyers at full market value. If prices crash then it is "all bets off" and the debt problem would look much less benign.

What I am trying to understand (and thanks for your help) is if the debt issue hasn't been slightly overblown because of the magical £1T number. Is it enough to trigger a crash in itself, or will an external shock of some kind be necessary ?

The problem is that debt and interest feeds upon itself, that's how our system sustains itself, paying it down would be deflationary, getting 'rid' would require further debt, which is no escape, that leaves massive inflation and devaluation, which then takes you back to the former.

This has always been so. What is unique about today's level of debt ? Remember, IRs are still "historically low" and they don't appear to be going up significantly any time soon.

[munro]

I gather last year the debt figure went up by 10%. So to keep our economy running at its present level needs a 10% increase every year in indebtedness. If people significantly cut their spending and started paying off their debts we'd probably go into recession. If the rate of increase of debt slowed to match increases in earnings (3-4%) I guess that might trigger a recession.

Somebody posted recently about the '29 crash - apparently a major factor was a credit crunch, because banks realised that if they kept on lending they wouldn't see their money back. I'm not sure whether the claim was that this lending, by cutting off the debt funding stream to the markets, caused the crash or whether it was a contributory factor. I think the general idea was that if debt levels keep rising at this sort of level sooner or later there's a credit crunch and then you get a recession.

If so it isn't the level of debt today that is of consequence, it's the rate it's increasing at - how long is an annual rate of increase of 10% feasible?

[Guest wrongmove]

If so it isn't the level of debt today that is of consequence, it's the rate it's increasing at - how long is an annual rate of increase of 10% feasible?

I agree that the rate of change is imortant, but it is a second order factor. The absolute level is more important. (Extreme example - debt increases by 100% from 50p to £1 - big deal !)

I should say that I agree that the level of debt, and the rate of increase, look very dodgy to me. I am not concerned with the rights and wrongs of this though, just as to whether it could cause a crash in itself. No doubt if a crash comes, for whatever reason, this debt will haunt all our futures - I'm just glad that none of it is mine !

[Guest Charlie The Tramp]

post='269797' date='Jan 8 2006, 10:02 PM' name='wrongmove'

What is unique about today's level of debt ? Remember, IRs are still "historically low" and they don't appear to be going up significantly any time soon.

If the survey by Alliance & Leicester a lender is to be believed then we should be very worried.

The majority of Britons would be unable to cope financially in the event of a minor household emergency according to the Alliance & Leicester. Just 28% said they had money put aside which could be used to replace household appliances, such as a cooker or fridge.

[Guest wrongmove]

If the survey by Alliance & Leicester a lender is to be believed then we should be very worried.

Hi Charlie ! I agree there is plenty to be worried about. Many are taking big risks, some without even really understanding it. But not all gambles are destined to fail. Any FTBs who can afford something (e.g.me) are also gambling by staying out of the market. If I bought a house and it dropped, it would p1ss me off, but I would survive, but if I don't buy and they rise I am truly shafted !

[We've gone]

The current debt issue is a pure cash based number. As Charlie the Tramp says, on a cash view a lot of people are in trouble, with few liquid savings.

On a larger view of assets & liabilities, lots of people own housing, an asset albeit overvalued, and pension assets, but generally massive unfunded forward-dated commitments in old age (obviously a long dated problem). Not an immediate issue, but as many have said, a big issue as people wake up to an impecunious old age.

The UK and UK's plcs have major problems too, mirroring the problems of private households, with debt and unfunded or underfunded pension funds high on the list (only 3 companies in the FTSE 100 said to have fully funded pension schemes).

The country is in trouble and there will be a downturn as there is enforced saving (further tax hikes and belt tightening). Maybe no direct link to the housing market but the boom prices will not survive generally bad times.

[CrashedOutAndBurned]

Big debtors aren't people you see on a tabloid TV show - they are everywhere.

Kids are leaing Uni in the thousands, often with loans that would have bought a BMW.

People are mewing and using the house as an ATM, or at least carrying lots of personal debt smug in the knowledge that their backs are covered by their house.

People are in debt because banks have invest billions in advertising and PR to bamboozle and hookwink them into the 'debt is good' culture.

If people start paying back their debts - even if it's just a few thousand pounds each - en masse the effects on the economy will be huge. When they were creating the debt, the money was funding a raft of goods and services goes out of circulation.

That spare 200 quid in the consumer's pocket that was going to spent, now goes back to the bank (with lots of interest added sucking yet more money out of circulation). As some people simply cannot repay their debts, banks decide not to lend so much and there's less fresh debt-money entering the system and it all goes rapidly pear shaped.

Retailers are already calling it the 'worst trading for 15 years' just because people are spending just a small % less than last year. Like individuals business need to keep making MORE money to keep on top of their own borrowings.

In a debt economy no one can just shrug their shoulders and say, 'Oh well, less money around, nevermind, no harm done'.

[Guest Charlie The Tramp]

Hi Charlie ! I agree there is plenty to be worried about. Many are taking big risks, some without even really understanding it. But not all gambles are destined to fail. Any FTBs who can afford something (e.g.me) are also gambling by staying out of the market. If I bought a house and it dropped, it would p1ss me off, but I would survive, but if I don't buy and they rise I am truly shafted !

I agree each and everyone of us has to make decisions which will affect our lives for good or bad.

All the properties I have purchased in the past were purchased as a home and not as an investment.

Personally I cannot believe that this HM will not return to sanity as IMO just a 0.75% rise in IRs and I dread to think how many will be knackered with the amount of mortgge debt and MEW they have taken on. The important thing if you decide to buy and think it would not cause any financial hardship with the above rise in rates, and the property you buy is located where you feel you could stay for a long period as your home, then I would say take that chance. In the last correction neighbours of mine bought at the top and within 3 years went into 40k negative equity. In no way were they worried saying to me we bought it as our home and here we will stay. Six years later they finally crossed to the right side of the line and are still perfectly happy where they are today. If you have a reasonable pension to come and I know you have a good job, one I believe was a wise choice then you should be okay. Where there are diseases wrongmoves are always required. Good luck whatever you decide you only have one life.

My intention when I go to that other world is to buy as many BTLs as I can and screw you lot when you join me.

[dubsie]

I'm not sure its as bad as the doom mongers say, but there certainly a greater willingness to borrow money than our parents and less stigma with debt and bankcruptcy.

The lenders could get a nasty shock if more and more people opt to go insolvent rather than pay back their lavish debts. Someone I know recently went bust owing more than £40,000 on credit cards, it took twelve months & cost £500.00 and now shes free from debt and all the worries that went with it.

The thing I find amusing is that companies are willing to lend knowing the persons income capacity and how much they owe. In my friends case they would never of been able to pay that back and it took a visit to an accountant that made her take the decision to go insolvent. I really hope some of these lenders get burnt.

[BuyingBear]

This has always been so. What is unique about today's level of debt ? Remember, IRs are still "historically low" and they don't appear to be going up significantly any time soon.

Low interest rates are no panacea, higher interest rates can actually be useful because they're accompanied by higher inflation, that's the only thing that has historically bailed people out when it comes to debt, this is in essence the "property ladder", but that brings its own problems of potential devaluation and destabilisation. Is better to service a debt at 10% with 6% inflation than at 6% with 2% stated inflation, when wages rise servicing the debt is no problem.

Inflation allows people to be robbed and houses to fall in value in real terms without people actually noticing, it is the most insidious tax system ever thought of. Certainly the people I have spoken to were not aware of a crash in the 1970's despite being involved in the market, to them an many others static prices for a couple of years meant no actual falls, people do not take in that a static price is no good if the underlying currency has lost 30% of its true value.

These days government adjusts the inflation figures for its own ends, it makes the public wage bill smaller (theorectically), the increases in pensions smaller and it makes it easier to finance the public debt. Why the market settles for this when it holds the power to demand better yields is another question, gilts set the base standard so lower returns on gilts also make it easier for companies to borrow because people take on greater risk in search of yield, often the return doesn't reflect the true risk.

Debt is growing >10% per year yet wages are only growing at <5%, or are actually static in the private sector once taxes and other bills are taken into account. So something has to give eventually, otherwise it gets to the stage where your whole salary couldn't even cover the interest payments let alone the principal.

They have succeeded in doing the Indian rope trick, at the moment.

[ellenmyfanwy]

UPTB's thread yesterday got mr thinking (Size Of Uk Economy, Quick Question)

In round numbers, UK personal debt is £1T in secured, and £200B in unsecured.

Big numbers !! That is £1,000,000,000,000 in mortgages and £200,000,000,000 in personal loans, credit cards etc.

But the UK GDP is also slightly over £1T - another big number.

So, taking the UK economy as a whole, we have a 1x income mortgage, and about 2 months income in unsecured lending.

Put like that, it doesn't look too bad, on the face of it. If that was me personally, I would be totally unconcerned by the mortgage, but I would be working to reduce the unsecured debt.

Early indications are that consumer appetite for unsecured debt is waning. If this figure drops in real terms, do we really have a lot to worry about as a nation ? I would be very interested in anyones thoughts of how small this number should be to be healthy, in terms of GDP.

i may have misunderstood, but you don't appear to have included government debt....would that make a difference?

[BuyingBear]

i may have misunderstood, but you don't appear to have included government debt....would that make a difference?

Yup, that's about another £480b officially, however with things like Railtrack and PPI/PFI debts hidden off balance sheet combined with unfunded public pensions (a liability is a debt) you are soon north of £1T, even greater than personal debt by some measures.

Anyone have a measure of debt held by limited companies? The fixed income market can often make equities appear irrelevant by comparison.

[padders]

If UK consumers have 1 * GDP in debt, does that mean about 6 to 7% of national income every year is being spent on interest payments?

This must explain where the limit ends. Imagine UK consumer debt was 3 trillion, and GDP 1 trillion. That would mean 18% of national income would be on interest payments.

I might be completly off base here, I havn't completly thought this through and its, em, quite late.

[Red Baron]

My intention when I go to that other world is to buy as many BTLs as I can and screw you lot when you join me.

Sorry Charlie, but TTRTR and I have already bought 'off-plan' in Heaven. It's the next property bubble.

However we will be happy to 'flip' one or two of these if you are interested. Prime addresses too - Jesus Street, Paradise Way, Redeemer's Court and how about a nice little 2 bed 'executive' BTL in a smart new development 'Heavenly View'.

IRs in Heaven are low - 0.25% and repayment mortgages are available on terms as long as 20 million years. There's an excellent free Newsletter too about trading up in Heaven's property - it's called 'Jacob's Ladder'.

[Guest wrongmove]

i may have misunderstood, but you don't appear to have included government debt....would that make a difference?

Yes, I'm sure it would - £0.5T in fact. And company debt as mentioned above (although foreign assets would have to factored in here).

I'm convinced - the debt issue is a very big one !