22685
UK Household Debt Burden Will Rise to 170%
World Economy

UK Household Debt Burden Will Rise to 170%

After more than six years of record-low interest rates, the looming increase hinted at by Bank of England policy makers may come as a shock to consumers driving Britain’s recovery.

As Governor Mark Carney signals that rates could rise early next year, officials are weighing the potential costs for the fastest-growing economy in the Group of Seven. A risk is that highly indebted households curtail their spending, putting the brakes on an expansion getting no help from exports, Bloomberg reported.

For many people under the age of 30, the increase will be the first of their working lives. The BOE has held its benchmark at 0.5% since March 2009, helping to fuel a housing boom that has left Britons owing a record £1.5 trillion ($2.3 trillion). The key rate averaged 4.5% in the preceding six years.

“I would expect the economy to be more sensitive to a 25 basis-point rise than in the past, since the level of household debt in the economy is still relatively high,” said David Tinsley, an economist at UBS Group AG in London. “There’s a segment of the household sector whose perceptions of a normal rate of interest is conditioned to be very low.”

One such person is Naomi Scott-Mearns, a 23-year-old environmental consultant who is saving to buy a home in London.

 Real Concern

“I think rates will rise within the next few years,” she said. “It is a real concern for people having to consider an interest-rate rise. I think some people will have to scale back spending.”

At more than 140% of income, the debt burden of British households is higher than in the US, Germany and France, and government forecasters see it rising to almost 170% by 2020. BOE financial-stability officials estimate about 5% of households have debts equal to four times their income or more.

A rate increase would immediately push up the cost of variable-rate mortgages, which account for almost 60% of outstanding home loans. The preference for fixed-rate debt in recent years may offer little respite as many are on short terms, according to Societe Generale SA economist Brian Hilliard.

 BOE Action

While most personal indebtedness is made up of mortgages, unsecured debt such as credit-card borrowing is growing at about 8% annually and on course to reach £10,000 per household by the end of 2016. Total debt costs would rise by £1,000 a year if interest rates were to increase by 2 percentage points, Pricewaterhouse Coopers estimated in a report in March.

The dangers are not lost on the BOE, which took action last year to stop people taking on debt they may eventually struggle to afford. Carney insists rates will go up gradually and peak below pre-crisis levels. Money markets are barely pricing in a benchmark rate of 1% by September next year.

Rising living standards could also help insulate consumers from rate increases. Wage growth accelerated at the fastest pace in more than five years in May, while inflation is zero.

“Borrowers that are up-to-date on their payments will be able to adjust their discretionary spending if incremental rate rises are spread out over the next three years,” said Emily Rombeau, an analyst at Moody’s Investors Service.

For now, the burden of debt remains manageable as lenders compete for market share by cutting rates to all-time lows. First-time buyers are losing just over a third of their take-home pay to mortgage payments, compared with more than a half when the BOE last raised interest rates, to 5.75%, in July 2007, according to Nationwide Building Society.

Short URL : http://goo.gl/fBQRVH

Trending

Googleplus