The UK economy is risking a major downturn due to unsustainable levels of household debt, a new report on consumer credit has found.
Describing the recovery as ‘extremely fragile’, the Verum Consumer Credit Trends Report for May 2014 has calculated that every 0.5 per cent increase in the Bank of England base rate would result in a ￡4.8 billion reduction in household spending. If the base rate increased to 3 per cent it would tip the UK economy back into recession.
Professor James Fitchett, of Leicester University School of Management, says in a foreword to the report: “The main problem facing the UK economy is therefore now a problem concerning consumer spending and debt. As these data show in considerable detail, the prospect of even slightly higher marginal lending rates could have a catastrophic effect on the economy.”
The Verum report warns that household debt remains unsustainably high due to spiralling mortgage debt.
Total household debt increased by 314 per cent from ￡347bn in 1990 to ￡1,437bn in 2013, of which 89 per cent was mortgage debt. House prices increased by 318% over the same period, while household incomes have risen by only 203 per cent.
Robert Macnab, Verum’s director of research, said: “This elevated level of mortgage debt is unsustainable. In a stable housing market, house prices should grow at the same rate as household incomes so that periodic ‘booms and busts’ are avoided. So unless wages increase quickly, which is unlikely, our analysis of the relationship between household incomes, debt and property prices indicates that UK house prices are currently over-valued by 28 per cent. The average should be nearer to ￡180,000 and not ￡250,000 as it is at present.”
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