- Household debt approaches record levels
- Real wages lower than before the financial crisis
- Stretched household budgets will constrain spending
- House buyers will continue to face tough affordability challenges
- Demand for rented accommodation should remain very strong
On 25th May, economists at the TUC released a report indicating that household borrowing within the UK is reaching a record high. By the end of the year, it estimates that unsecured debt per household will exceed the levels prevailing immediately before the credit crunch.
In 2008, on the eve of the financial crisis, the average household had unsecured debts totalling £13,300. That figure fell rapidly in the immediate aftermath of the crash but, by the end of 2016, it had risen again to £13,200. Analysts expect it to rise steadily this year and beyond, reaching an estimated £15,400 by the end of 2021.
An economic challenge:
The continuing rise in household borrowing presents a complex challenge for the Bank of England, which must maintain a difficult balance between nurturing economic growth and keeping inflation in check. For so long as interests rates remain at the current historic low (a move designed to boost the economy by encouraging business investment and spending) high levels of debt may be regarded as manageable. However, if rising inflation should force the Bank's Monetary Policy Committee (MPC) to raise interest rates, then the ability of ordinary households to service their debts may become increasingly strained. At such times, widespread consumer debt can become a serious problem.
The Bank of England will certainly view the current situation with caution, mindful of the economic difficulties created by excessive debt in the run-up to the last big recession. In recent years, both the Bank and the UK Government have devoted considerable attention to mitigating those risks, particularly with regard to mortgage lending. No one wishes to see another housing market crisis and the mortgage stress-testing introduced under 2014's Mortgage Market Review was one of several measures intended to prevent it.
The housing market has moderated in the last year or so, and - with the possible exception of central London - it never became the 'bubble' that many commentators had feared. The present conditions do not therefore threaten the stability of the property market itself, although the sector may be subject to some knock-on effects, which could ultimately prove to be a modest mixture of losses and gains.
Inflation, borrowing and the base rate:
There will inevitably be a desire to keep borrowing in check, and one way of doing that would be to raise interest rates. This would also have a positive effect on inflation, which is currently riding well ahead of the Bank of England's 2% target. However, ministers and Bank officials recognise that there is a pronounced downside to such an action. Given the uncertainties associated with Brexit, the forthcoming election and a whole host of other challenges, the country's economic recovery is by no means certain, and higher interest rates could easily act as a braking force on growth. That would be unwelcome and politically unpopular, as would the inevitable increase in mortgage costs for homeowners. Most industry commentators therefore expect to see no change in the base rate until at least the end of 2018.
What is certain is that wage growth has been severely constrained over the course of the last decade and in real terms, average wages are lower now than they were in 2008. Moreover, with the exchange rate working against sterling and driving up the rate of inflation, living costs are rising and families are feeling the squeeze. The natural consequence of this is that many have turned to credit cards to finance certain purchases and, for so long as borrowing remains cheap, the trend is likely to continue.
Whether or not this becomes an economic time bomb remains to be seen but, in the meantime, an increase in consumer debt has important implications for property owners, prospective buyers and investors.
Implications for property:
The first and most obvious consequence is that increasing wage-strain and household debt will add to the difficulties faced by people hoping to save enough of a deposit to buy their first home. First-time-buyers have faced a host of well-documented challenges in recent years and nothing in the current economic picture suggests that affordability will improve any time soon.
For investors, this implies an extended period of strong and steady demand for rental accommodation. While families struggle to find a property to buy, they must of course live somewhere, and the private rental sector is invariably the most accessible and popular alternative.
Despite a succession of new taxes aimed at landlords, the rental market looks set to remain resilient. Employment levels remain high across most parts of the UK, and the average rate is rising. Wages might not be high but more and more families are enjoying a steady working income that enables them to pay the rent and other vital bills.
Of course, it might be argued that rising inflation and slow wage growth could ultimately constrain the potential for rental income growth. After all, it's hard to achieve rising rentals when tenants are struggling to make ends meet. However, here is where location becomes a crucial factor. While the figures and statistics cited above are broad national averages, rental market conditions vary enormously from place to place. In areas that are economically buoyant - benefiting from rising employment and significant inward investment - healthy yields should still be easy to achieve. It is important not to let national headlines cloud one's judgement about individual investments.
Implications for prices:
The same is true of house prices and the prospects for capital appreciation. Taken as a whole, the UK housing market is currently subject to a range of contrary forces. Slow wage growth and rising inflation will tend to limit people's disposable incomes, which might limit their ability to buy and therefore suppress price growth. On the other hand, properties are in notoriously short supply and demand far exceeds the housing stock available. Such an imbalance tends to push prices higher.
The effect of this economic tug-of-war can be seen in the way average prices have changed in recent years. At a national level, mortgage lending (one measure of market activity) has remained broadly static since 2014 and prices have grown at a modest but steady rate. A big change in wage rates, employment, housing supply or the base rate of lending could see that equilibrium shift but, for now, no such change looks likely.
What is more significant is the way that property prices vary by location. Again, national averages say very little about what an investor can expect from any particular acquisition, so it pays to take advantage of as much local research as possible. Faced with a complex economic picture, there is no substitute for hard information, good advice and real expertise about local property markets.
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