crisis averted, or delayed reaction?

………………………………………………………………………………………………………………………………………… …………………………………………………………………………………………………………………………………………

Crisis averted,

or delayed reaction?

Analysis of Money Advice Service data on the over-indebted population

November 2013

……………………………………………………………………………………………………..

………………………………………………………………………………………………………………………………………… …………………………………………………………………………………………………………………………………………

We haven’t experienced the debt crisis many envisaged in 2008; is it still to come?

• At the aggregate level, loose monetary policy has helped avoid the wave of defaults many predicted

• But data suggests there is a significant vulnerable rump, especially among lower income households

• Many have been unable to take advantage of the window of opportunity for paying debts down – and may still be exposed when rates start to rise

• Would benefit from pre-emptive support, but difficult for banks and policy makers to identify those who are current but close to the edge

2

……………………………………………………………………………………………………..

………………………………………………………………………………………………………………………………………… …………………………………………………………………………………………………………………………………………

The net worth distribution has become more skewed over the course of the downturn

……………………………………………………………………………………………………..

Net worth (assets less

liabilities) fell between 2005

and 2012 among the

bottom three-quarters of

mortgagors and increased

for the wealthiest

quarter

Source: Bank of England, NMG Consulting

3

………………………………………………………………………………………………………………………………………… …………………………………………………………………………………………………………………………………………

The net worth distribution has become more skewed over the course of the downturn

……………………………………………………………………………………………………..

Among renters,

around half have negative

net worth, with the

picture again deteriorating

since 2005 for all but the top

20 per cent

(Note the different scale)


4

………………………………………………………………………………………………………………………………………… …………………………………………………………………………………………………………………………………………

And debt repayment exposures are highest in the bottom half of the income distribution

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

1 (lowest)

2 3 4 5 6 7 8 9 10 (highest)

Average repayments as share of income (lhs)

Proportion spending more than 25% gross income on repayments (lhs)

Average debt-income ratio (rhs)

……………………………………………………………………………………………………..


Although higher income

households hold more

debt on average,

debtors in lower deciles

are much more likely to be allocating

more than one-quarter of

their (gross) income on

repayments

………………………………………………………………………………………………………………………………………… …………………………………………………………………………………………………………………………………………

The numbers of households in ‘debt peril’ has fallen since 2007, thanks to ultra-loose monetary policy

……………………………………………………………………………………………………..

The proportion of households in ‘debt peril’

peaked at over 3% in 2007, just prior to

the financial crisis

With the base

rate at a historic low,

the proportion fell to around

2% in 2011 (and may be a little lower still

today)

6

Source: Modelling based on ONS, Living Costs and Food Survey

………………………………………………………………………………………………………………………………………… …………………………………………………………………………………………………………………………………………

Clearly an increase in interest rates today would push large numbers of households into peril

……………………………………………………………………………………………………..

A 2ppt overnight

increase in the base rate would

push 4% of households into

debt peril

Clearly this cannot happen,

but illustrates the level of

sensitivity to interest rates

and the importance of

the current monetary

stance

7


………………………………………………………………………………………………………………………………………… …………………………………………………………………………………………………………………………………………

Under ongoing low rates and good household income growth, exposure to debt is broadly constant

……………………………………………………………………………………………………..

Taking an optimistic view

about income growth – that it keeps pace

with GDP and is evenly

shared – the proportion of households in

peril would increase

slightly to just under 3%

8


………………………………………………………………………………………………………………………………………… …………………………………………………………………………………………………………………………………………

But ‘bad’ income growth and a modest interest rate shock produces a doubling of ‘debt peril’ levels

……………………………………………………………………………………………………..

Under the worst (yet still

plausible) of our scenarios,

the proportion of households in ‘debt peril’

would jump to around 5%, more than double the

baseline level and

significantly higher than

the levels recorded even at the start of

the crisis

9


………………………………………………………………………………………………………………………………………… …………………………………………………………………………………………………………………………………………

Can divide over-indebted population into those already displaying distress and those who may be ‘hidden’

10

……………………………………………………………………………………………………..

Over-indebted population

(18% of all adults)

Don’t consider self to be in debt (4%)

Consider self to be in debt (14%)

Missed or fallen behind on credit payment or bill in

three of last six months (10%)

Up to date with payments but find

debts a heavy burden (4%)

Around two-thirds of those

who are considered to

be over-indebted are in

arrears on some

payments, but a sizeable

minority are up to date but

highly stressed

………………………………………………………………………………………………………………………………………… …………………………………………………………………………………………………………………………………………

Those who are current but stressed appear to carry their burden for longer than those in arrears

11

……………………………………………………………………………………………………..

Those in arrears are

perhaps more likely to take or be forced

into remedial action which means they

remain in the data for a

shorter amount of

time than the current but

stressed group

For how long have you struggled with bills and credit commitments?

Source: Money Advice Service

………………………………………………………………………………………………………………………………………… …………………………………………………………………………………………………………………………………………

In many ways, those who are current but stressed look much like those in arrears

12

……………………………………………………………………………………………………..

All of those considered

over-indebted report similar

responses, with close to

three-quarters believing that

living in debt is an inevitability

in the current context

In current climate, living in debt is inevitable for people like me


………………………………………………………………………………………………………………………………………… …………………………………………………………………………………………………………………………………………


13

……………………………………………………………………………………………………..

In both instances, just over half can’t imagine being free of debt at any point, and

only one-quarter actively

disagree with this statement

I can't see that I’m ever going to be in a situation where I am free of debt


………………………………………………………………………………………………………………………………………… …………………………………………………………………………………………………………………………………………


14

……………………………………………………………………………………………………..

Those already in arrears are

a little more likely to say

that their debt means they sometimes

can’t afford the basics, but close to half of those who are

still current are also in this

position

My debt means I can’t always afford to buy basic household items


………………………………………………………………………………………………………………………………………… …………………………………………………………………………………………………………………………………………

The key difference is in relation to access to, and use of, further credit

15

……………………………………………………………………………………………………..

One-quarter of those who are

current but highly stressed

say they’ve found it

difficult to access credit in

the past 12 months,

compared with more than half

of those in arrears

In the last 12 months, have you found it difficult to get credit?


………………………………………………………………………………………………………………………………………… …………………………………………………………………………………………………………………………………………


16

……………………………………………………………………………………………………..

One-fifth of the current but stressed group

say they’ve been declined

credit, but more than two-fifths

actively disagree – suggesting

they’ve accessed new

credit

I have been declined credit in the last six months


………………………………………………………………………………………………………………………………………… …………………………………………………………………………………………………………………………………………


17

……………………………………………………………………………………………………..

Around one-quarter of both over-

indebted groups are

reliant on credit cards, but a higher

proportion of the current but stressed group

disagree with the statement

I can only manage my monthly finances by paying for things on credit card


………………………………………………………………………………………………………………………………………… …………………………………………………………………………………………………………………………………………


18

……………………………………………………………………………………………………..

Fewer than one-fifth of the

over-indebted think they’re

getting a good deal on their credit cards

and loans, with the

current but stressed group

doing very slightly better

I am getting a good deal on my credit cards/loans


………………………………………………………………………………………………………………………………………… …………………………………………………………………………………………………………………………………………

In terms of dealing with difficulties, the two groups display some similarities and some differences

19

……………………………………………………………………………………………………..

Levels of stigma appear broadly

similar across the over-

indebted, with around two-fifths saying

they’d be too embarrassed to

discuss their financial situation

I would be too embarrassed to discuss my financial situation


………………………………………………………………………………………………………………………………………… …………………………………………………………………………………………………………………………………………


20

……………………………………………………………………………………………………..

And around one-half saying

that they are worried that other people

think their difficulties are

all of their own making

I’m worried that other people think my money difficulties are all my own fault


………………………………………………………………………………………………………………………………………… …………………………………………………………………………………………………………………………………………


21

……………………………………………………………………………………………………..

Those already in arrears are more likely to

show a lack of confidence

about negotiating

with creditors, but fewer of

those who are still current

consider the question to be

relevant to them

I’m don’t have the confidence to negotiate with the people I owe money to


………………………………………………………………………………………………………………………………………… …………………………………………………………………………………………………………………………………………


22

……………………………………………………………………………………………………..

Those already in arrears are

much more likely to say

they need help to establish

their legal rights and

obligations, though half of

the current but stressed group are also in this

position

Being aware of my legal rights and obligations would help me fix my situation


………………………………………………………………………………………………………………………………………… …………………………………………………………………………………………………………………………………………


23

……………………………………………………………………………………………………..

More than 90% of the over-

indebted think drawing up a

budget would help, but

significantly fewer of the

current group think they need

help to establish this

Putting together a weekly or monthly budget would help me fix my situation


………………………………………………………………………………………………………………………………………… …………………………………………………………………………………………………………………………………………


• Ultra low interest rates offer a window of opportunity, but the sequencing of income growth and monetary tightening in the coming years is uncertain

• Members of the ‘current but stressed’ group are likely to be particularly exposed to a changing interest rate environment

• They are just as troubled as those in arrears, but are less likely to have presented to date and more likely to still have access to credit

24

……………………………………………………………………………………………………..

………………………………………………………………………………………………………………………………………… …………………………………………………………………………………………………………………………………………


• Credit access can help with restructuring, but could also lead to further difficulties down the line

• In everybody’s interests to identify this group before borrowing costs rise, but difficult

– Individual lenders have incomplete information and a lack of immediate incentive

– Borrowers may not seek help due to stigma and embarrassment

• Cost of living squeeze limits potential responses even where families can be identified

25

……………………………………………………………………………………………………..

crisis averted, or delayed reaction?

Economy & Finance