Amount of UK consumer debt exceeds UK GDP as country
struggles to pay off personal debt – says Grant
Thornton
Thursday 23 August 2007
Ten years ago today, on 23 August, the UK had generated enough GDP
to cover its outstanding amount of consumer debt. This year the
country will run out of time to do so and have to wait until
January 5 next year, using proceeds from 2008 to cover this year's
debt. This is a further example of how, over recent years, the
country has gorged on relatively cheap borrowing and fuelled its
debt levels, according to new research issued today by Grant
Thornton's personal insolvency practice.
Grant Thornton research shows that the total amount of
outstanding UK consumer debt, £1,345 billion, amassed through
mortgages, loans and credit card balances, has now exceeded the
amount generated by the UK economy which, according to the latest
available data*, is estimated to have stood at around £1,330
billion.
"Britain's huge level of consumer debt is symptomatic of the
country's well established 'buy now pay later' culture. We can no
longer generate enough yearly GDP to cover the amount we owe and
need next year's income to cover this year's debts," said Stephen
Gifford, Grant Thornton's chief economist.
"Fortunately, most consumer debt is secured and can be repaid
over several years otherwise we would be technically bankrupt", he
continued.
Mark Allen, a partner within Grant Thornton's personal
insolvency practice, says "It is undeniable that much of the UK's
economic growth of the past few years has benefited in no short
measure from rising levels of consumer spending, much of which has
been on credit. Most of this debt is perfectly serviceable and
secured on dwellings, however, the rising debt levels have led to
growing numbers of individuals being tipped over the financial
edge."
Over the past ten years personal insolvencies have risen from an
average of 24,000 per year in 1997 to 107,000 last year and 2007
numbers likely to rise even further.
Allen says, "It's not uncommon these days to see some
individuals with unsecured debt upwards of £50,000 spread across
four or five credit cards and a mortgage on top of that. In our
experience these are the sort of people walking a perilous
financial tightrope. All it takes is an increase in costs, or, as
is the present case, a rise in mortgage premiums due to higher
interest rates, to force people to default on their repayments -
hence the increases in bankruptcies and IVAs."
The date when the UK can cover its consumer debt has come later
and later in the calendar over the past decade. In 1997 the date
fell on 23 August, the result of individual mortgage and personal
debt amounting to £503 billion compared to the GDP of £786
billion . In ten years, the calendar time of this day has
increased by some five months.
Gifford says, "The level of debt has so far not caused much of a
problem for the UK economy. Interest rates have been historically
low and the UK economy has been ticking along healthily. But with
five interest rate rises in the past year the picture is changing
and becoming a burden for families and households."
The burden of interest payments
Over the past decade the level of
mortgage payments has been increasingly making a bigger dent in
household income. Mortgage interest payments as a percentage of
income has risen from 12.5% of income in Q1 1997 to the current
figure of 17.6% in May 2007 and are set to rise even further with
the latest interest rise in July.
The increase has been more dramatic for first-time buyers who
now (May 2007) face interest payments of around 18.1% of income
compared to 16.6% faced by existing owners.
Source: Council of Mortgage Lenders
The scale of debt in the UK
The scale of individual debt has increased sharply over recent
times. By the end of June 2007, total lending to individuals
reached £1,345 billion, of which 84% or £1,131 billion was mortgage
lending and the remainder £214 billion was consumer credit (of
which £54 billion was secured on credit cards).
Table: Total individual debts (£ billion)
| |
1997 (to May) |
2007 (to June) |
| Secured on dwellings |
419 |
1,131 |
| Consumer credit |
84 |
214 |
| Total |
503 |
1,345 |
Source: Bank of England
Of the £1,345 billion, some 56% is secured with UK resident
banks, 15% with building societies and 29% with other lenders .
* Year to end of Q2 2007.
About the ONS data
In the UK, estimates of lending and GDP are available from the
ONS website and the Bank of England website.
Press release on lending to individuals
http://www.bankofengland.co.uk/statistics/li/current/index.htm
Full statistical release on lending to individuals
http://www.bankofengland.co.uk/statistics/li/2007/may/lendind.pdf
Monetary & Financial Statistics (Bankstats) June 2007
http://www.bankofengland.co.uk/statistics/ms/current/
http://www.bankofengland.co.uk/statistics/ms/current/#a
A5.2 Total lending to individuals: net lending
http://www.bankofengland.co.uk/statistics/ms/2007/Jun/taba5.2.xls
VTXH: Lending to individuals (secured on dwellings amounts
outstanding)
VZRD: Lending to individuals (consumer credit amounts
outstanding)
VZQB: Total lending to individuals (amounts outstanding)