Crisis averted, or delayed reaction?

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1. …………………………………………………………………………………………………….. Crisis averted, or delayed reaction? Analysis of…
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  • 1. …………………………………………………………………………………………………….. Crisis averted, or delayed reaction? Analysis of Money Advice Service data on the over-indebted population November 2013 ………………………………………………………………………………………………………………………………………… …………………………………………………………………………………………………………………………………………
  • 2. We haven’t experienced the debt crisis many envisaged in 2008; is it still to come? …………………………………………………………………………………………………….. • At the aggregate level, loose monetary policy has helped avoid the wave of defaults many predicted • But data suggests there is a significant vulnerable rump, especially among lower income households • Many have been unable to take advantage of the window of opportunity for paying debts down – and may still be exposed when rates start to rise • Would benefit from pre-emptive support, but difficult for banks and policy makers to identify those who are current but close to the edge ………………………………………………………………………………………………………………………………………… ………………………………………………………………………………………………………………………………………… 2
  • 3. The net worth distribution has become more skewed over the course of the downturn …………………………………………………………………………………………………….. Net worth (assets less liabilities) fell between 2005 and 2012 among the bottom threequarters of mortgagors and increased for the wealthiest quarter Source: Bank of England, NMG Consulting ………………………………………………………………………………………………………………………………………… ………………………………………………………………………………………………………………………………………… 3
  • 4. The net worth distribution has become more skewed over the course of the downturn …………………………………………………………………………………………………….. Among renters, around half have negative net worth, with the picture again deteriorating since 2005 for all but the top 20 per cent (Note the different scale) Source: Bank of England, NMG Consulting ………………………………………………………………………………………………………………………………………… ………………………………………………………………………………………………………………………………………… 4
  • 5. And debt repayment exposures are highest in the bottom half of the income distribution …………………………………………………………………………………………………….. 50% 5.0 Average repayments as share of income (lhs) 45% 4.5 Proportion spending more than 25% gross income on repayments (lhs) 40% 4.0 Average debt-income ratio (rhs) 35% 3.5 30% 3.0 25% 2.5 20% 2.0 15% 1.5 10% 1.0 5% 0.5 0% 0.0 1 (lowest) 2 3 4 Source: Bank of England, NMG Consulting 5 6 7 8 9 Although higher income households hold more debt on average, debtors in lower deciles are much more likely to be allocating more than one-quarter of their (gross) income on repayments 10 (highest) ………………………………………………………………………………………………………………………………………… …………………………………………………………………………………………………………………………………………
  • 6. The numbers of households in ‘debt peril’ has fallen since 2007, thanks to ultra-loose monetary policy …………………………………………………………………………………………………….. Source: Modelling based on ONS, Living Costs and Food Survey The proportion of households in ‘debt peril’ peaked at over 3% in 2007, just prior to the financial crisis With the base rate at a historic low, the proportion fell to around 2% in 2011 (and may be a little lower still today) ………………………………………………………………………………………………………………………………………… ………………………………………………………………………………………………………………………………………… 6
  • 7. Clearly an increase in interest rates today would push large numbers of households into peril …………………………………………………………………………………………………….. A 2ppt overnight increase in the base rate would push 4% of households into debt peril Clearly this cannot happen, but illustrates the level of sensitivity to interest rates and the importance of the current monetary Source: Modelling based on ONS, Living Costs and Food Survey stance ………………………………………………………………………………………………………………………………………… ………………………………………………………………………………………………………………………………………… 7
  • 8. Under ongoing low rates and good household income growth, exposure to debt is broadly constant …………………………………………………………………………………………………….. Taking an optimistic view about income growth – that it keeps pace with GDP and is evenly shared – the proportion of households in peril would increase slightly to just under 3% Source: Modelling based on ONS, Living Costs and Food Survey ………………………………………………………………………………………………………………………………………… ………………………………………………………………………………………………………………………………………… 8
  • 9. But ‘bad’ income growth and a modest interest rate shock produces a doubling of ‘debt peril’ levels …………………………………………………………………………………………………….. Under the worst (yet still plausible) of our scenarios, the proportion of households in ‘debt peril’ would jump to around 5%, more than double the baseline level and significantly higher than the levels recorded even at the start of Source: Modelling based on ONS, Living Costs and Food Survey the crisis ………………………………………………………………………………………………………………………………………… ………………………………………………………………………………………………………………………………………… 9
  • 10. Can divide over-indebted population into those already displaying distress and those who may be ‘hidden’ …………………………………………………………………………………………………….. Don’t consider self to be in debt (4%) Over-indebted population (18% of all adults) Consider self to be in debt (14%) Missed or fallen behind on credit payment or bill in three of last six months (10%) Up to date with payments but find debts a heavy burden (4%) Around twothirds of those who are considered to be overindebted are in arrears on some payments, but a sizeable minority are up to date but highly stressed ………………………………………………………………………………………………………………………………………… ………………………………………………………………………………………………………………………………………… 10
  • 11. Those who are current but stressed appear to carry their burden for longer than those in arrears …………………………………………………………………………………………………….. For how long have you struggled with bills and credit commitments? Those in arrears are perhaps more likely to take or be forced into remedial action which means they remain in the data for a shorter amount of time than the current but stressed group Source: Money Advice Service ………………………………………………………………………………………………………………………………………… ………………………………………………………………………………………………………………………………………… 11
  • 12. In many ways, those who are current but stressed look much like those in arrears …………………………………………………………………………………………………….. In current climate, living in debt is inevitable for people like me All of those considered over-indebted report similar responses, with close to three-quarters believing that living in debt is an inevitability in the current context Source: Money Advice Service ………………………………………………………………………………………………………………………………………… ………………………………………………………………………………………………………………………………………… 12
  • 13. In many ways, those who are current but stressed look much like those in arrears …………………………………………………………………………………………………….. I can't see that I’m ever going to be in a situation where I am free of debt In both instances, just over half can’t imagine being free of debt at any point, and only onequarter actively disagree with this statement Source: Money Advice Service ………………………………………………………………………………………………………………………………………… ………………………………………………………………………………………………………………………………………… 13
  • 14. In many ways, those who are current but stressed look much like those in arrears …………………………………………………………………………………………………….. My debt means I can’t always afford to buy basic household items Those already in arrears are a little more likely to say that their debt means they sometimes can’t afford the basics, but close to half of those who are still current are also in this position Source: Money Advice Service ………………………………………………………………………………………………………………………………………… ………………………………………………………………………………………………………………………………………… 14
  • 15. The key difference is in relation to access to, and use of, further credit …………………………………………………………………………………………………….. In the last 12 months, have you found it difficult to get credit? One-quarter of those who are current but highly stressed say they’ve found it difficult to access credit in the past 12 months, compared with more than half of those in arrears Source: Money Advice Service ………………………………………………………………………………………………………………………………………… ………………………………………………………………………………………………………………………………………… 15
  • 16. The key difference is in relation to access to, and use of, further credit …………………………………………………………………………………………………….. I have been declined credit in the last six months One-fifth of the current but stressed group say they’ve been declined credit, but more than two-fifths actively disagree – suggesting they’ve accessed new credit Source: Money Advice Service ………………………………………………………………………………………………………………………………………… ………………………………………………………………………………………………………………………………………… 16
  • 17. The key difference is in relation to access to, and use of, further credit …………………………………………………………………………………………………….. I can only manage my monthly finances by paying for things on credit card Around onequarter of both overindebted groups are reliant on credit cards, but a higher proportion of the current but stressed group disagree with the statement Source: Money Advice Service ………………………………………………………………………………………………………………………………………… ………………………………………………………………………………………………………………………………………… 17
  • 18. The key difference is in relation to access to, and use of, further credit …………………………………………………………………………………………………….. I am getting a good deal on my credit cards/loans Fewer than one-fifth of the over-indebted think they’re getting a good deal on their credit cards and loans, with the current but stressed group doing very slightly better Source: Money Advice Service ………………………………………………………………………………………………………………………………………… ………………………………………………………………………………………………………………………………………… 18
  • 19. In terms of dealing with difficulties, the two groups display some similarities and some differences …………………………………………………………………………………………………….. I would be too embarrassed to discuss my financial situation Levels of stigma appear broadly similar across the overindebted, with around twofifths saying they’d be too embarrassed to discuss their financial situation Source: Money Advice Service ………………………………………………………………………………………………………………………………………… ………………………………………………………………………………………………………………………………………… 19
  • 20. In terms of dealing with difficulties, the two groups display some similarities and some differences …………………………………………………………………………………………………….. I’m worried that other people think my money difficulties are all my own fault And around one-half saying that they are worried that other people think their difficulties are all of their own making Source: Money Advice Service ………………………………………………………………………………………………………………………………………… ………………………………………………………………………………………………………………………………………… 20
  • 21. In terms of dealing with difficulties, the two groups display some similarities and some differences …………………………………………………………………………………………………….. I’m don’t have the confidence to negotiate with the people I owe money to Those already in arrears are more likely to show a lack of confidence about negotiating with creditors, but fewer of those who are still current consider the question to be relevant to them Source: Money Advice Service ………………………………………………………………………………………………………………………………………… ………………………………………………………………………………………………………………………………………… 21
  • 22. In terms of dealing with difficulties, the two groups display some similarities and some differences …………………………………………………………………………………………………….. Being aware of my legal rights and obligations would help me fix my situation Those already in arrears are much more likely to say they need help to establish their legal rights and obligations, though half of the current but stressed group are also in this position Source: Money Advice Service ………………………………………………………………………………………………………………………………………… ………………………………………………………………………………………………………………………………………… 22
  • 23. In terms of dealing with difficulties, the two groups display some similarities and some differences …………………………………………………………………………………………………….. Putting together a weekly or monthly budget would help me fix my situation More than 90% of the overindebted think drawing up a budget would help, but significantly fewer of the current group think they need help to establish this Source: Money Advice Service ………………………………………………………………………………………………………………………………………… ………………………………………………………………………………………………………………………………………… 23
  • 24. We haven’t experienced the debt crisis many envisaged in 2008; is it still to come? …………………………………………………………………………………………………….. • Ultra low interest rates offer a window of opportunity, but the sequencing of income growth and monetary tightening in the coming years is uncertain • Members of the ‘current but stressed’ group are likely to be particularly exposed to a changing interest rate environment • They are just as troubled as those in arrears, but are less likely to have presented to date and more likely to still have access to credit ………………………………………………………………………………………………………………………………………… ………………………………………………………………………………………………………………………………………… 24
  • 25. We haven’t experienced the debt crisis many envisaged in 2008; is it still to come? …………………………………………………………………………………………………….. • Credit access can help with restructuring, but could also lead to further difficulties down the line • In everybody’s interests to identify this group before borrowing costs rise, but difficult – Individual lenders have incomplete information and a lack of immediate incentive – Borrowers may not seek help due to stigma and embarrassment • Cost of living squeeze limits potential responses even where families can be identified ………………………………………………………………………………………………………………………………………… ………………………………………………………………………………………………………………………………………… 25
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