It’s troubling because out of all household commitments, mortgage payments are right at the top of the family budget priority list, so if things are starting to creak at the top, others things down the list must be screaming.
Consumer debt has stabilised but it’s still at record levels. Yet credit card and loan offers are still coming through the mailbox thick and fast. There are clearly many consumers who cant resist the temptation of ‘free and easy’ credit, backed by loyalty schemes and air mile programs that reward by getting even deeper into debt. Certainly at blackandwhite.co.uk we are seeing more and more clients who are in desperate trouble, in way over their means. We had a client recently with over £80,000 on credit card debt. The Sunday Times reported of a customer with over £400,000 on consumer debt – and all on an annual salary of £32,000. Not good maths.
The consumer debt problem is exacerbated by rising housing prices. Consumers often live in a false economy where an over-inflated opinion of their overall balance sheet worth keeps them swiping their cards at the till.
But things are tight and have been tightened by factors beyond household control, rather than irresponsible spending. The average household fuel bill has risen 30 per cent in 12 months, and the Bank of England’s target rate for inflation of 2.0 per cent is fast becoming aspirational.
Average inflation, as measured by the all-items Retail Prices Index, rose to 3.4 per cent in August, the highest since the beginning of last year. Interestingly the Bank of England has inflation at 2.5 per cent because it doesn’t count housing, but, food, electricity and other household costs have risen 6.2 per cent in the year to August. Ouch. Personal bankruptcies and Individual Voluntary Arrangements (IVAs) have soared 117 per cent in 12 months.
So what does it all mean for the broker community? Reluctantly I have to join the camp of doom-sayers and back a further tightening of interest rates, probably before year-end. That will take the Base Rate to 5 per cent, from its comfortable 4.5 per cent a few months ago. There is a different psychology attached to a Base Rate number starting with the number five. Moving it from 4.5 per cent to 4.75 per cent, I’m sure went largely un-noticed.
Another interest rate rise means mortgage payments will have climbed 11 per cent in 2006, and that will hurt. A growth in missed mortgage payments is a worrying trend, given its priority in the order of household debts. There is currently tremendous competition in the non-conforming lending market, driven by some very big players fighting for market share. Mortgages plc, Money Partners, GMAC-RFC, GE Money Home Lending (GEMHL) and some new entrants on the horizon are keeping things sharp. But a further rise in rates will pressure affordability ratios, and I am sure in lender credit committees around the UK there are some furrowed brows, interpreting the latest inflation and missed mortgage payments data.
Thomas Reeh
CEO
Blackandwhite.co.uk
