Squeeze and sliding house prices to push up bad debts

The number of households falling behind on their mortgage, credit card and personal loan repayments is expected to rise, the Bank of England warned yesterday.

In its latest Credit Conditions survey, the Bank cautioned that, while the number of borrowers getting into difficulty had been relatively stable, banks and building societies believe that the problem will get worse over the next few months.

The Bank said: "Lenders reported that the default rate on secured loans to households was broadly unchanged over the previous quarter, but that it was expected to increase in the coming quarter. Losses given default were reported to have increased for the third consecutive quarter in the second quarter of 2011 and were expected to increase again in the third quarter."

Default rates on unsecured loans were reported to have fallen for the seventh successive quarter. But losses on credit card loans increased between April and June this year, and were expected to increase further until September.

A number of commentators have warned about the danger of an explosion in negative equity, mortgage data and repossessions because of a lethal cocktail of factors. Richard Banks, the chief executive of UK Asset Resolution, the state company that runs the £80bn of "bad bank" loans inherited from Northern Rock and Bradford & Bingley, said this week that the nation faced a "tsunami" of repossessions. The Council of Mortgage Lenders is predicting they will rise from 36,000 last year to 40,000 this and 45,000 in 2012.

The trend to higher interest rates, though they may not materialise until next year, may add to the pressure already faced by householders coping with high inflation, tax hikes and benefit cuts. In the case of the those public sector and other workers facing redundancy the issue will be still more critical.

The other factor is the continuing slide in house prices. The Nationwide building society said that average prices rose by just 0.2 per cent on the year, with an annual decline of 1.2 per cent.

However, the relatively stagnant national picture disguises some dramatic regional differences: hot spots include Carlisle (up 13 per cent), Manchester (+10 per cent) and Bath (+10 per cent). Less well favoured are Belfast, down 13 per cent in the backwash from Ireland's financial crisis, Dundee (down 11 per cent) and Oxford (minus 6 per cent). London continued to defy national trends by rising 2.9 per cent.