Debt…an affordability issue
The British Bankers' Association (BBA) is the UK’s leading association for the Banking Sector. They have just released this month’s High Street Banking stats showing an appetite for people looking to borrow more money.
In terms of our own business we would be greatly concerned around the levels of people we are meeting who appear to be getting into more and more debt and fail to understand or even consider the consequences.
The stats show that housing market activity appears to be moderating. Year-on-year, new mortgage lending is 15% higher and approvals for house purchase have risen by 5%. However, annual comparisons have been slowing in recent months - the number of mortgage approvals for house purchases stood at 41,588 in August, below the average of the previous six months of 43,533.
Due to the seasonal holidays, the autumn months tend to be busier for house-buying than the summer, but these stats coupled with other analysts opinions suggest there could be a plateau in housing activity leading to the question have the fortunate few with money saved in the bank account for a deposit already spent it?
The figures in their release reveal strong rises in unsecured personal loans. The amount of new borrowing through personal loans is outstripping repayments every month this year. I air on the side of caution reading a statement like that, this shows all the signs of a debt bubble waiting to burst.
The data shows that there was actually £175m in net borrowing in personal loans in August and £346m in net borrowing through credit cards. Such a consistent rise in this type of borrowing has not been seen since 2007, the BBA has said. David Dooks, statistics director at the BBA said that "When customers feel more optimistic about the economic outlook they are much more likely to take on new borrowing."
But are customers more optimistic? The rate of pay increases in the UK has caught up with the inflation rate (which charts the rising cost of living), this is suggesting that people are more confident to borrow. A rise in personal loans would be an example of this.
The Institute for Fiscal Studies predicts that wage growth will start to outpace inflation this year. That is seen as good news for households, where prices have risen faster than average incomes since the financial crisis. That means that families have not been able to buy as much with the money that comes in. Lower inflation means this may be about to turn around.
The fact remains, unsecured personal loans usually finance car purchases, home improvements or a consolidation of numerous credit card debts in an attempt to restructure your financial position. This is all well in good if you can afford a personal loan but in our experience, personal loans only give a partial picture of debt. Personal loans are generally not the choice of those stretched to financial breaking point and struggling to make payments on existing debt.
In addition, the geographical breakdown of lending is important. Northern Ireland’s economy lags behind the rest of the UK. Given the recovery of Northern Ireland's private sector has slowed down and Treasury penalties for the non-implementation of welfare reform will cost Northern Ireland Executive £87m this year, rising to £114m next year. With other financial pressures, this threatens to also see deep cuts to frontline Public Sector services.
With the cost of debt set to increase due to interest rate rises on the horizon, one thing is for sure, debt is an affordability issue and debt is about to become more unaffordable.