Last week was quite a week for figures. The day after the Bank of England raised rates, the personal insolvency figures for the second quarter of the year showed a record 26,000 people becoming insolvent – an increase of 66 per cent on the same period in 2005. The Council of Mortgage Lender’s (CML) Repossession Risk Review, published that same day, gave some key insights into the drivers behind repossessions and these, coupled with recent data on insolvencies, certainly gives pause for thought.
Insolvencies rising
Personal insolvencies have been rising steadily since 2004. Many commentators have blamed the Enterprise Act 2004 for this. However, according to the Bank of England’s Inflation Report (May 2006), the impact of this is limited as Individual Voluntary Arrangements (IVAs) in England and Wales, which accounted for some 30 per cent of all new insolvencies in 2005, were unaffected by the Act. But, nonetheless, we saw a threefold increase of insolvencies since early 2004.
Some of the triggers must consequently lie elsewhere and I shall consider these in a moment. First, however, it is worth considering the underlying issue. The graph to the right illustrates the ratio of household debt to post tax income and clearly shows how both the secured and unsecured debt levels have been rising. Some 65 per cent of mortgage borrowers have unsecured credit commitments in addition to secured debts. Of these, 25-30 per cent of borrowers were experiencing some problem and around 8 per cent considered their unsecured debts to be a heavy burden.
Ratio of household debt to post tax income
Given this background, it is hardly surprising that relatively minor triggers are tipping some into arrears and financial difficulty, causing the CML to raise its forecast to 130,000 from 120,000 mortgages in arrears of over three months by the end of 2007, and 15,000 repossessions in both 2006 and 2007 (up from the previous forecast of 12,000).
Causes of the debt chaos
So which are the factors that are causing this rise? The CML has found changes in income through unemployment, sickness, redundancy or injury as the most significant factor, but other important issues include changes in household circumstances through relationship break-up, the arrival of a new baby and increased expenditure on mortgage payments, utility bills and council tax.
In the current environment we are seeing a bit of all of the above; long-term underlying social changes, such as the breakdown in relationships, have recently been coupled with an upturn in the number of people out of work for over six months, rising council tax rates, higher utility bills as rising oil prices feed through to consumers and, finally, rising interest rates. All of these factors combined are pushing those most at risk over the edge.
So who are the most vulnerable? The CML has identified them as typically young, having unsecured debts, past mortgage payment problems, high mortgage service burdens, little housing equity and lower savings and they share many of these features with the typical first-time buyer of the last few years.
Against a background of fast-rising house prices this is less of an issue, as lenders seek to accommodate borrowers in arrears through payment holidays and capitalisation of arrears. However, in today’s environment of moderate rises in house prices this is less likely to occur.
So what does the future hold for vulnerable borrowers and those on the cusp of financial worries? This is where the argument comes full circle – those in trouble are trapped in houses whose value is not increasing exponentially. In addition, lenders are looking warily and carefully at levels of unsecured debt. In looking to protect themselves, we suspect we may see mortgage lenders losing some patience and those in arrears finding they had less of a window than they had thought.
