Dealing with debt presentation - Katie Blacklock and Matthew Whittaker

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This is the slide presentation by Katie Blacklock and Matthew Whittaker at the Resolution Foundation event, Dealing with debt. It covers Resolution Foundation's latest analysis of which households are most at risk and what policy responses might be needed to help ease the adjustment back to a more normal era of monetary policy. This event was held on 3 June 2014. For more details go to: res-fdn.org/dealwithukdebt This event was live tweeted at @ukdebt
Transcript
  • 1. …………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………… Dealing with Debt The prospect of rising interest rates and the UK’s household debt problem Katie Blacklock & Matthew Whittaker …………………………………………………………………………………………………….. #ukdebt
  • 2. …………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………… Despite economic improvement, UK has potentially large debt overhang that requires careful dismantling • Household debt increased significantly in recent decades, particularly in the pre-crisis years • Driven by rising demand (in part due to rapid house price growth) and easier supply (with a loosening of credit criteria) • Entered the downturn with sizeable household debt burden which hasn’t been adequately dealt with • A changing environment – and rate rises in particular – raises new challenges 2 …………………………………………………………………………………………………….. #ukdebt
  • 3. …………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………… UK household borrowing increased rapidly pre-crisis, driven primarily by secured lending Debt as a share of household incomes rose sharply from 2002, reaching a peak of 170% immediately prior to the financial crisis Increase was primarily driven by a growth in secured lending …………………………………………………………………………………………………….. #ukdebt 3 Source: OECD & OBR
  • 4. …………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………… Households have since gone through some de-leveraging, but the UK still stands out Debt to income ratio has fallen in the UK, but remains higher than in most other countries at 140% De-leveraging in the US has taken the ratio below 120% …………………………………………………………………………………………………….. #ukdebt 4 Source: OECD & OBR
  • 5. …………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………… And the OBR thinks that the period of de-leveraging has come to an end Source: OECD & OBR Projections from March 2014 suggest the UK debt to income ratio will head back to its pre-crisis peak by the start of 2019 As before, this is expected to be driven by secured lending associated with house price increases …………………………………………………………………………………………………….. #ukdebt 5
  • 6. …………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………… …………………………………………………………………………………………………….. Despite the UK’s exposure, the household debt fall-out post-crash has been relatively muted Numbers of households in arrears on their mortgage and having their home taken into possession rose sharply after the financial crisis, but did not reach the levels anticipated and have since fallen Source: CML #ukdebt 6
  • 7. …………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………… • The relatively small house price correction – But there are regional differences • The surprising resilience of employment – But real wages have tumbled • Loose monetary policy – But interest rates are set to rise again • Lender forbearance & government support – Likely to unwind as house prices and interest rates rise Thanks to four key factors, all of which are subject to some uncertainty …………………………………………………………………………………………………….. #ukdebt 7
  • 8. …………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………… But, despite historic low base rate, mortgage difficulties remain elevated Given depth of recent downturn and falls in earnings and incomes, falling borrowing costs have provided only partial relief for many mortgagors …………………………………………………………………………………………………….. Source: Bank of England, NMG Survey 2013 8#ukdebt
  • 9. …………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………… And can’t necessarily rely on strong rebound in earnings during economic recovery Typical earnings were flat in real terms even before the start of the downturn. They have since fallen by around £2,000 a year, taking them back to a level last seen at the turn of the century And recovery in pay is set to be slow at best …………………………………………………………………………………………………….. Source: Modelling based on OBR, Economic and Fiscal Outlook 9#ukdebt
  • 10. …………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………… Even under gradual rate rises and falling lender spreads, exposure to debt is set to increase …………………………………………………………………………………………………….. If the base rate rises in line with current expectations and lenders continue to narrow their spreads, the proportion of mortgagor households spending more than one-third of their after- tax income on repayments is set to double by 2018 Source: Modelling based on DWP, Family Resources Survey 10 Affordability Highly geared households in 2014 (base rate at 0.5%) 1,130,000 13% 2,330,000 27% Re-financing Very low equity households in 2014 Affordability Highly geared households in 2014 (base rate at 0.5%) Highly geared households in 2018 (base rate at 2.9%) 760,000 9% 2,760,000 33% At risk Highly geared in 2018 and potential mortgage prisoners in 2014 Re-financing Very low equity households in 2014 Other non-standard circumstances in 2014 770,000 9% At risk Highly geared in 2018 and potential mortgage prisoners in 2014 #ukdebt
  • 11. …………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………… Potential ‘mortgage prisoners’ will find their options for re-financing limited …………………………………………………………………………………………………….. Re-mortgaging options today are likely to be limited for those with less than 5% equity in their home and for some other groups We add those with interest only mortgages and the self- employed to create an imperfect proxySource: Modelling based on DWP, Family Resources Survey 11 Affordability Highly geared households in 2014 (base rate at 0.5%) 1,130,000 13% 2,330,000 27% Re-financing Very low equity households in 2014 Affordability Highly geared households in 2014 (base rate at 0.5%) Highly geared households in 2018 (base rate at 2.9%) 760,000 9% 2,760,000 33% At risk Highly geared in 2018 and potential mortgage prisoners in 2014 Re-financing Very low equity households in 2014 Other non-standard circumstances in 2014 770,000 9% At risk Highly geared in 2018 and potential mortgage prisoners in 2014 #ukdebt
  • 12. …………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………… With those facing the double exposure appearing particularly vulnerable to rate rises …………………………………………………………………………………………………….. Around one-in- ten of today’s mortgagors sit within both of these groups, meaning they are likely to have limited ability to insulate themselves against rising rates These borrowers are perhaps most ‘at risk’ Source: Modelling based on DWP, Family Resources Survey 12 Affordability Highly geared households in 2014 (base rate at 0.5%) 1,130,000 13% 2,330,000 27% Re-financing Very low equity households in 2014 Affordability Highly geared households in 2014 (base rate at 0.5%) Highly geared households in 2018 (base rate at 2.9%) 760,000 9% 2,760,000 33% At risk Highly geared in 2018 and potential mortgage prisoners in 2014 Re-financing Very low equity households in 2014 Other non-standard circumstances in 2014 770,000 9% At risk Highly geared in 2018 and potential mortgage prisoners in 2014 #ukdebt
  • 13. …………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………… This ‘at risk’ group is particularly prevalent in Northern Ireland and in London …………………………………………………………………………………………………….. Large house price falls mean that we might expect more ‘prisoners’ to live in Northern Ireland But affordability is a bigger issue in London due to the amount borrowers stretched themselves pre-crisisSource: Modelling based on DWP, Family Resources Survey 13#ukdebt
  • 14. …………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………… And the problem is relatively concentrated among borrowers with low to middle incomes …………………………………………………………………………………………………….. Vulnerability to the double exposure of gearing and prisoner status falls across the income distribution – worrying because we might expect those with the lowest incomes to have most difficulty coping with rising bills Source: Modelling based on DWP, Family Resources Survey 14#ukdebt
  • 15. …………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………… Of course, actual outcomes will depend on the sequencing of income rises and rate increases …………………………………………………………………………………………………….. Looking at wider (secured and unsecured) debt repayments, an optimistic scenario for incomes and rates suggests that the number in ‘debt peril’ might double by 2018 Source: Modelling based on ONS, Living Costs and Food Survey 15#ukdebt
  • 16. …………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………… With ‘bad’ income growth and a modest interest rate shock having very significant consequences …………………………………………………………………………………………………….. Under a much more pessimistic (but still plausible) scenario, the proportion of households in ‘debt peril’ would jump to around 7%, more than triple the baseline level Source: Modelling based on ONS, Living Costs and Food Survey 16#ukdebt
  • 17. …………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………… We haven’t experienced the debt crisis many envisaged in 2008; is it still to come? • Ultra low interest rates, lender forbearance and government support have provided breathing space, but the underlying problem of affordability remains • Focus has been on fixing the flow of new borrowers, but stock issue still needs resolving • Unwinding of emergency measures is inevitable, but requires the same level of co-ordinated policy response as was seen in post crisis years 17 …………………………………………………………………………………………………….. #ukdebt
  • 18. …………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………… Dealing with the debt overhang will not be costless, but there are policy options • Tread carefully with rate rises • Rates must rise, but much debate around timing, pace and magnitude • Sequencing of rate rises and recovery in household incomes crucial • Make the most of the window while it remains in place • Borrowers need to insulate themselves against rate rises • Requires signposting, market options and support for ‘prisoners’ • Prepare for a rise in repayment problems • Need to ensure capacity to deal with rising demand for debt advice • Need to tackle social and economic upheaval associated with an increase in repossessions 18 …………………………………………………………………………………………………….. #ukdebt
  • 19. …………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………… Dealing with Debt The prospect of rising interest rates and the UK’s household debt problem #ukdebt Adair Turner – Senior Fellow, INET Katie Blacklock and Matthew Whittaker – Resolution Foundation Gavin Kelly (Chair) – Resolution Foundation 3 June 2014
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