The maxed out ratio

Take a look at gross lending as a percent of GDP and you begin to understand why the housing bubble has reached the end of the road. Housing credit has grown far faster than output, and is now at an unsustainable level. The economy has taken on too much debt, and like a child that has eaten too much birthday cake, it is now feeling nauseous. The economy is heading for the bathroom, and it is about to throw up.

The extent of gross mortgage lending relative to GDP is extraordinary. For every ₤100 of income generated by the economy, banks are originating loans amounting to ₤27. Back in the early 1970s, this ratio was in the low single digits. Even during the great housing bubble year of 1989, the ratio was just a fraction over 10 percent.

However, if you look more closely at the data, it is clear that this number has peaked. During the last four years the number seems to have got stuck at somewhere between 25-27 percent of GDP. It as if the economy is resisting any further increase in housing-related debt.

Behind this resistance and stagnation are millions of desperate households, loaded with debt and struggling with zero real income growth. As the data suggests, households have reached the threshold; the housing bubble can not extract any more and we are now moving into a period of adjustment. Default rates are beginning to increase, banks are pulling back, and prices are falling.

As this adjustment takes hold, the mortgage lending to GDP ratio will begin to fall, and as it slides, a sense of normality will return. The importance of housing to the economy will diminish. Debt levels will begin to fall and perhaps, the great national obsession with housing will gradually subside.