Bank of England deputy governor urges people not to panic over household debts

Ben Broadbent said that most of the growth in unsecured debt over the past decade was accounted for by car and student loans, which are different from other forms of debt

A deputy Bank of England governor has sought to calm fears over rising UK household borrowing saying that claims that it is “unsustainable” are overblown.

The TUC earlier this month warned that unsecured debt per person has hit a record high and claimed that borrowing is now at “crisis level”.

But in a speech in London on Wednesday Ben Broadbent, deputy governor for monetary policy, said most of the growth in unsecured debt in recent years has been acccounted for by “Personal Contract Purchases” (PCP) car finance and student loans.

He suggested these must be treated differently from other forms of unsecured debt such as credit cards because in the case of car loans the lender bears more of the risk, and with student loans repayments are contingent on the borrower earning above £25,000 a year.

On PCPs Mr Broadbent said: “The lenders may have deeper pockets than the borrowers, or at least greater scope for diversification. And as evidenced by their dominance of the market these contracts clearly represent a convenient method of paying for a car, even for households who are otherwise adding to savings. Their growth is not evidence that people are outspending their income in aggregate.”

On secured mortgage debt, Mr Broadbent pointed out that the large increase in borrowing primarily reflected higher house prices, which had been driven up by lower interest rates.

He noted that typical household mortgage repayment costs were also low by historic standards due to those interest rates, meaning the financial burden on households was still lower than before the financial crisis. Further, he noted that interest rates were not expected to rise sharply to pre-crisis levels.

“This makes it slightly puzzling to read (as one often does) that household debt is ‘unsustainably’ high. This view is ubiquitous. My suspicion is that, at least in some cases, people come to it because they have in the back of their minds an alternative and rather attractive world in which we all have fewer debts but the same assets,” he said.

Mr Broadbent also pointed to analysis suggesting that historically the growth of household debt is more important than the level when it comes to creating the conditions for a crisis.

Unsecured debt risk?

“That doesn’t mean the level of debt doesn’t matter. But it may matter only relative to some sustainable threshold, one that’s not directly observable and that can vary,” he said.

“The precise terms, and therefore the riskiness of a given quantity of debt, are not exactly the same in every country.”