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EDITIONS
Tuesday, 5 November, 2002, 15:38 GMT
Are Britons heading for a debt disaster?
A credit card, a home and a car
Unsecured personal debt has reached a record 140bn

Forget the late 1980's boom, Britain in 2002 has seemingly gone credit mad.

From homebuyers borrowing four or even five times their annual income to get on the housing ladder to shoppers splashing out on their credit cards - Britons are in debt like never before.

Unsecured personal debt, such as credit cards and loans, has now reached a record 140bn.

That equates to more than 2,300 owed by every man, woman and child in the UK.

At Leeds-based debt charity the Consumer Credit Counselling Service (CCCS), a service that helps people with often chronic debts, the picture is clear.

They recently said their client's average personal debt had now reached 24,000.

Will the flexible friend in our wallets and purses become our foe - and could the nightmare of negative equity return to haunt us?

Borrower boon

A willingness to take on more debt has been supported by optimistic consumers, a housing market boom and cheap borrowing.


If we see large scale job losses then this could be the catalyst for the housing market falling of its perch

John Higgins Nomura group chief economist

Interest rates are at their lowest level for a generation, which is bad news for savers but a boon for borrowers.

Even when consumers borrow up to five times their income it is very affordable, for now, at least.

Mortgage repayments currently swallow up on average a third of homeowners disposable income, compared to just over a half at the height of the late eighties market boom.

In addition, new entrants into the UK lending market - many from the United States - have sparked a price war from which the savvy consumer could have benefited.

In recent years some credit cards have offered an introductory rate actually below the rate of inflation - in effect, in real terms, giving money to consumers.

Housing market

As a rule of thumb, if people feel richer they spend and borrow more.

And the runaway housing market has made homeowners - the majority of UK consumers - feel richer.

According to a recent survey by the online bank Egg, since 1988 debt has increased on average by 112% but house prices have gone up by 141%.

No wonder why people feel rich - and consumer confidence has been driving the economy.


With inflation now so low it will take much longer for the debt to shrink in real terms

John Higgins

In fact, the property market boom has had a far greater impact on consumer confidence than the dramatic fall from grace of the stock market since the spring of 2000.

Job losses

But there are signs that those factors that have helped prop up the debt mountain could also turn it into a house of cards.

The Nationwide warned in October that job losses in the City were already dampening demand at the top end of the property market.

The mortgage lenders talk of a 'soft landing' in the housing market by which they mean growth falling gently from near 20% to around 5%.

However, John Higgins, chief economist at Nomura Group, warns that a rise in unemployment could be dramatic.

It could send the housing market into reverse.

"If we see large scale job losses then this could be the catalyst for the housing market falling of its perch," Mr Higgins told BBC News Online.

If that happens the wheels could fall off the UK economy.

"If the prop of the housing market was kicked away then it is likely that the scales would be tipped towards recession," Mr Higgins said.

Negative equity

In addition, Mr Higgins argues that the debt being built up by UK consumers could haunt them later.

"In the past, having a substantial debt was often manageable as inflation soon eroded it.

"However, with inflation now so low it will take much longer for the debt to shrink in real terms."

So, what should borrowers do to escape a future credit-crunch?

David Hollingworth, of London Country Mortgages, suggests the transformation of the mortgage market in recent years could provide hope to borrowers.

"Many mortgage providers allow borrowers to overpay - this is one way to get on top of the loan early and prevent problems arising in the future," Mr Hollingsworth told BBC News Online.

See also:

31 Oct 02 | Business
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02 Sep 02 | Business
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