Uneven distribution of borrowing is the real problem

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The Independent Online

The numbers are awesome. Total household debt of an estimated £1.34 trillion (£1,340 billion, or £1,340,000,000,000) ought to be enough to give the nation sleepless nights.

Then again, it amounts to about £22,000 for every one of the 60 million men women and children in the land. An average British family of four, therefore, has a total financial commitment - including overdrafts, personal loans, credit cards and mortgage - of £88,000.

Looked at that way, it looks fine. It's also less frightening if you put it into the context of the way banks and building societies lend to individuals. The bulk of the nation's household debts are mortgages, where a typical loan might amount to three or four year's salary. Yet the UK, on that basis, "only" owes one year's salary, and much of that is actually owed to the members of the "UK family", with comparatively little owed to foreign entities. Any defaulting would be almost a private matter.

That's a little complacent. The problems are that debt is unevenly distributed and the era of cheap credit and the spiralling house prices that fuelled so much of the credit boom (it fed on itself to some degree) is ending. Debt is concentrated among the young. It's long been normal for people in their 20s, taking their first step on the housing ladder and starting a family, to borrow.

Today, they need to borrow far larger multiples of their income to buy a home. In 1980 it would take one and three quarters of a year's salary to see you in your starter home; now a borrower will need to persuade the bank to lend them well over three times their annual income. If they're graduates they'll also have to deal with another £10,000 to £15,000 of student loans. If they live in London, they'll have to deal with a property market inflated by the billionaires who have alighted on the capital as an ideal place to work, rest and play.

Unlike their parents, young families can no longer rely on rampant inflation to destroy the real value of debt. Deregulated financial institutions are willing to lend us sums that would have knocked the bowler hats off the conservative bank managers of yesteryear. Not long ago, a shih-tzu dog named Monty Slater was offered a credit card with an £8,000 limit by the Royal Bank of Scotland.

Most pernicious has been the rise of the UK's own "sub-prime" sector - 6 per cent of the mortgage market - and recently roundly condemned by the Financial Services Authority for its failure to even check whether its customers can pay back their loans. Of 45 sub-prime lenders audited by the FSA, none had adequately covered all of their responsibilities in their policies and procedures. Given that their customers were already poor credit risks, that is especially disturbing. The spectre of the US housing slump haunts the scene.

While interest rates were at historically low levels, even the most reckless could cope with the consequences. "Credit card tarts" could hop from card to card to take advantage of zero-interest offers. No more. Now we've seen interest rates rise five times in a year to a six-year high. Taxes and the other "fixed costs" of living have risen too, squeezing the disposable income of British households. Savings have fallen to levels last seen in 1960. The cost of servicing the average mortgage (interest and capital repayments) has returned to the peak levels last seen in the early 1990s, in the middle of the previous recession. Wages are still rising, but they are not keeping up with steadily rising taxes and interest burdens.

The omens are not good. Repossessions, county court judgments for debt, insolvencies and bankruptcies are running at high levels by the standards of recent years. The nation as a whole might be solvent, but many of us have been living well beyond our means.

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