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Fears of fresh debt bust overblown

Fears of fresh debt bust overblown

Most UK households are well placed to cope with a new era of slow, measured interest rate rises despite their high levels of consumer debt, according to a report by a living standards think tank.

The Resolution Foundation’s research found fears about surging household debt are exaggerated, even though it noted nearly half of lower income households are showing signs of ‘debt distress’.

Levels of consumer debt have risen 10 per cent in the last year to a total of £1.9trn, leading to concerns about what will happen when the Bank of England raises interest rates.

But the report ‘An Unhealthy Interest?’ found most households will be able to cope with slow and steady rate rises.

This is partly because the cost of servicing the debt is low compared to history – repayments account for 7.7 per cent of people’s disposable income today, in line with the mid-90s and early 2000s, and compared to 12.3 per cent just before the financial crisis.

The recent surge in borrowing has been led by higher income households, which will be more able to meet their repayments in years to come, the Foundation said. A lot of the growth in consumer credit has been for dealership car financing, which places much of the risk on lenders rather than borrowers, the report said.  

Absolute debt levels are high, however, especially among the young.

Households headed by someone aged 25-34 spent nearly £1 in every £5 of their pre-tax income on debt repayments in 2017, compared to 20p for households aged 65 and over.

For some households, the debt burden is too heavy.

The report found that three in ten working age households show at least one sign of debt distress, including 21 per cent who have had difficulty paying their rent or mortgage.

To show how households might cope with rising interest rises, the report models the impact of an overnight two percentage point increase in mortgage rates, while noting that in reality borrowing costs are likely to build much more gradually.

In this scenario, the percentage of the population falling into the ‘at risk’ category of those spending 30 per cent or more of their pre-tax income on mortgage debt servicing would rise from 12 per cent to 15 per cent.

The Resolution Foundation warns the Bank must closely monitor the distribution of debt across households in Britain as it embarks on further tightening.

Matt Whittaker, chief economist at the Resolution Foundation, said: “Rapidly rising consumer credit and the prospect of faster interest rate rises have led some to warn loudly of the imminent bursting of another credit bubble.

"But these fears appear to be overblown, with much of the recent credit growth being driven by higher income households who are much better placed to service their debts.

The Bank of England and the Financial Conduct Authority are at odds over how worrye they should be over the current level of UK household debt.

The Bank's Financial Policy Committee (FPC) has said in September that consumer debt levels in the UK are at below average levels and are not a threat to economic growth.

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