Sunday, 6 January 2008

Mortgages and credit cards - how the UK sank into the debt swamp

How did we let things get so bad? How did the UK households become so deeply mired in debt?

The numbers just beggar belief. As of November this year, UK households owe an eye watering £1,400 billion. In the previous 12 months, that number increased by over 10 percent. That debt pile costs £94.5 billion in interest payments each year.

Lets put that number into context. Over the last year, (2006q3-2007q4) UK GDP was 1.37 billion, with household disposable income running at about £855 billion. Therefore the debt stock amounts to 102 percent of GDP and about 160 percent of disposable income. Interest payments are running at 11 percent of household incomes.

A breakdown of the debt into housing and non housing related debt show that about 84 percent is mortgage related, with the remainder being unsecured debt (credit cards and loans).

Can it go on? Can we keep piling on the debt without a thought of how it will be repaid? A rational answer would be no, but UK households have long stopped thinking rationally about debt and housing. During the Christmas period, shoppers were still pulling out the credit cards. When the December data becomes available, those debt numbers will look even more desperate.


Jim in San Marcos said...

The thing that bothers me is who is loaning the money to the credit card companies? Common sense implies that these debts will be extremely hard to repay if the economy gets worse.

The real surprise might be finding out who this lender is. I just hope it's not a retirement fund.

Anonymous said...

Jim: ¨The real surprise might be finding out who this lender is. I just hope it's not a retirement fund.¨

The money has been manufactured. But yes, those folk who after the dot com crash put their pension fund into cash instruments, because there is ¨nothing like cash in the bank¨, well, they are going to get a nasty suprise. I imagine, their cash has probably been securitized and those securities are probably pretty much worthless.