FT: UK Households fight debt mountain


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UK Households fight debt mountain

By Norma Cohen
Financial Times
Published: October 30 2009 20:50

When Christians Against Poverty, the debt counselling charity, first
opened its office in Bracknell just more than three years ago, its
leaders were not even sure its services would be needed in so
comfortable a commuter heartland.

Bracknell, just a few miles from glamorous Ascot and in the heart of
Berkshire’s so-called Golden Triangle, does not at first glance appear
a community crying out for a charity dedicated to helping people live
within their means. Until a year ago, said Andy Jackson, centre
director, its clientele was indeed largely single parents and those on
at least one income benefit.

But around the time that the collapse of Lehman Brothers sent shudders
through the global financial system all that began to change, said Mr
Jackson, who was on his way to see a family in an upmarket part of the
town when the Financial Times called.

“Typically, cases are where bonuses haven’t come through at the level
that was expected or salary increases haven’t come through as
expected,” he said. Their ranks include a number of homeowners who
saddled themselves with second mortgages in order to pay down higher
interest consumer debts.

“We have people who are locked into second mortgages where the
interest rate goes up no matter what happens to other rates,” he said.
“And there are people who are counting on an inheritance from someone
who hasn’t died yet.”

Mr Jackson emphasises that only a fraction of those who approach his
charity are middle class professionals. Nevertheless, Christians
Against Poverty’s experience in Bracknell and elsewhere offers an
anecdotal underpinning to widespread economic and financial data that
show British households are fighting to get out from under a mountain
of debt.

Official data show the national savings rate rose to 5.6 per cent of
income in the second quarter of 2009 and is expected to rise further,
in line with patterns that typically follow recessions. Just a year
earlier it was negative.

Michael Saunders, economist at Citi, points out how badly consumers
need to curb their borrowing habit. At the end of the second quarter
this year, the ratio of average household debt to income stood at just
over 166 per cent -- in other words, people’s debts totalled more than
half as much again as their income.



Moreover, the data show that much of that borrowing was secured
against housing; unsecured debt was more than 23 per cent of mortgage
debt at the end of 2003 but that fell to 18.6 per cent by the end of
2007.

Now, many economists believe, Britain’s recovery will be held back as
households refrain from spending in order to repay debt. The National
Institute of Economic and Social Research forecasts that the heavy
debt load will lead to greater “scarring” in the UK than in many other
nations. Even by 2011, GDP growth is likely to be no more than 1.5 per
cent, below trend, as nominal spending is held back.

Martin Weale, director of NIESR, said part of it involved an
intentional build-up of savings while part was due to credit rationing
by banks. Banks have held credit card rates steady as the Bank of
England cut its own rate close to zero and poured £175bn into the
banking system to stimulate spending.

Already, that is having an effect. Bank of England data this week
showed that even as the number and value of mortgage loans rose in
September, net consumer credit actually fell by £262m as households
repaid more loans than they took out. That decline was the third in a
row and net borrowing is now below the six month average growth rate.

Mr Jackson said his own clients borrowed for items such as cars and
holidays -- seen not as luxuries but as non-negotiable staples of a
middle class existence.

http://www.ft.com/cms/s/0/14864114-c592-11de-9b3b-00144feab49a.html
 

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