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Last Updated: Monday, 28 June, 2004, 19:07 GMT 20:07 UK
Bank warns about household debt
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UK household debt is at record highs
The historically high level of UK household debt may pose "considerable challenges" to UK financial stability, the Bank of England has warned.

In its twice-yearly Financial Stability Review, the Bank cautioned about the effect of future interest rate rises.

The Review said high household debts could be a "considerable challenge" if interest rates were to keep going up.

It also repeated the recent warning of the Bank's Governor Mervyn King that property values may fall.

"Considerable challenges remain in an environment of firming interest rates and, for many borrowers, historically high levels of household debt," it said.

House price falls

Seven years ago UK households held as much debt as they were earning. Now outstanding debt stands at 135% of household income. Mortgage lending by banks, meanwhile, is growing by 10% a quarter and unsecured lending in the form of credit cards, loans and overdrafts by 13% a quarter over the past year.

"The UK household sector debt-to-income ratio has continued to rise rapidly, increasing households' vulnerability to any unexpected rises in interest rates or falls in incomes," warned the Review.

Turning its attention to the housing market, it added: "Prospects for house prices are highly uncertain and, after the strength of house price inflation in recent years, the chances of a fall have risen."

"If that were to happen, housing equity would be reduced and capital gearing raised, increasing household mortgage arrears and thus raising the risk of write-offs."

In other words, the bank fears a house price crash that leaves homeowners trapped in negative equity. With owners stretched to pay off their mortgages, many could default on their mortgages, which in turn would hit banks and thus the wider economy.


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