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More people seeking help on debt  http://www.anxietyculture.com/householddebt.htm Just seven years after it broke through ...
The UK’s household debt problem: Is there one? - and if so, who’s at risk? Richard Disney Institute for Fiscal Studies, & ...
The UK’s debt problem? <ul><li>January is a time of short cold days, high winds… </li></ul><ul><li>… and also a time of me...
<ul><li>The macroeconomic story… </li></ul><ul><li>Household debt in the UK has increased rapidly…both secured on property...
Secured, rather than unsecured debt should be the current concern?
House price increases lead to extra secured debt (‘mortgage equity withdrawal’) with a time lag
But which are the households ‘at risk’? <ul><li>Examine data at the household level on: </li></ul><ul><ul><li>Use of credi...
Our previous research…. <ul><li>Research published in  Fiscal Studies  early   in 2004 with colleague Sarah Bridges </li><...
Our families in 1999* * That we also observe in 2004 Use of debt instruments 1999 Owners 42% Tenants 58% Averages Age: 37 ...
Owners in 1999  Use of debt instruments 1999 Remainowners by 2004 92% Credit cards Credit cards Store cards Store cards Lo...
Owners in 1999  Use of debt instruments 1999 Remainowners by 2004 92% 33% 47% 15% 9% Credit cards Credit cards Store cards...
Tenants in 1999  Become  owners  by 2004  21% Use of debt instruments 1999 Remain tenants by 2004 79% Credit cards Credit ...
Tenants in 1999  Become  owners  by 2004  21% Use of debt instruments 1999 Remain tenants by 2004 79% 40% 25% 10% 16% Cred...
Summary on use of credit 1999-2004 <ul><li>Nearly 60% of our sample of families were tenants in 1999; by 2004 almost half ...
Household debt problems <ul><li>SOLIF/FACS asks a series of questions about household ‘debt’ problems. </li></ul><ul><li>W...
Proportion unable to make payment on cards by household type 1999 3% Owners 1999 Owners 2004 10% Owners 1999 Tenants 2004 ...
Proportion unable to make payment on cards by household type 1999 & 2004 3% Owners 1999 Owners 2004 10% Owners 1999 Tenant...
Proportion unable to make repayments on loans by household type 1999 3% Owners 1999 Owners 2004 8% Owners 1999 Tenants 200...
Proportion unable to make repayments on loans by household type 1999 & 2004 3% Owners 1999 Owners 2004 Owners 1999 Tenants...
Proportion in arrears on at least one utility bill or council tax by household type 1999 17% Owners 1999 Owners 2004 27% O...
Proportion in arrears on at least one utility bill or council tax by household type 1999 & 2004 3% Owners 1999 Owners 2004...
Household debt problems <ul><li>Have reduced considerably as sample has aged 5 years </li></ul><ul><li>Least  important de...
A matched sample <ul><li>Previous results a combination of ‘life cycle’ and ‘time’ effects. </li></ul><ul><li>We can separ...
Priorities in policies towards household debt? <ul><li>Cooling-off periods for ‘store cards’? </li></ul><ul><ul><li>Store ...
Low income households <ul><li>Size of ‘home credit’ and unregulated market – less clear from surveys.  Our data suggest si...
Many debt issues not covered in this talk An unashamed plug…. <ul><li>Surveys the economics of consumer credit </li></ul><...
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Transcript of "IFS_debt_problem_24-.."

  1. 1. More people seeking help on debt http://www.anxietyculture.com/householddebt.htm Just seven years after it broke through the £500bn level for the first time, the mountain of debt amassed by British households has reached £1 trillion, the Bank of England said yesterday. Tony Blair's time in Downing Street has seen a doubling of consumer debt in response to the property boom and the increasing willingness of individuals to use credit cards and overdrafts to finance live-now, pay-later spending habits. Debt difficulties: People ignore problems at their peril A free debt helpline has received a big increase in inquiries during the Christmas period. The Consumer Credit Counselling Service (CCCS) said calls in December were up by 77% on the same month in 2003. Debt misery • It takes an average earner 40 days just to pay off the £2,400 interest on the average level of credit card and loan debt. February 10th (the 41st day of 2005) has thus been dubbed 'Debt Freedom Day'. • 15% of people say their debts are spiralling out of control or keeping them awake at night, according to a YouGov survey. • Citizens Advice Bureau advisors have dealt with a 47% increase in personal debt problems over the last five years. • A quarter of those in debt are receiving treatment for stress, depression and anxiety from their GP, according to the Citizens Advice Bureau. • 1.4 million customers on electricity or gas pre-payment meters have disconnected themselves for fear of running up debt. • Bankruptcies increased by 30% last year, and by nearly 30% the previous year, according to the DTI. • The biggest cause of rows within a relationship is not infidelity but money, according to Relate. • The amount of debt being chased by Britain's bailiffs has soared by 70% over the past two years. • Sainsbury's Bank predicts that 30% of personal loans taken out this year will be for &quot;debt consolidation&quot; (ie paying off other outstanding debts). £1,000,000,000,000. Household debt breaks the one trillion barrier Appetite for bigger mortgages behind doubling of personal borrowing in past seven years Larry Elliott, economics editor Friday July 30, 2004 The Guardian According to Experian three in four Britons admit to worrying about financial pressures during the festive season. The festive season is turning into ‘Stressmas’ as 20% of us are still paying off our Christmas up to six months later. Whilst the celebrations and partying may be over in a few weeks a report from Virgin Credit Card found Brits take an average of three months to pay off the £13 billion festive celebrations bill they rack up each year, meaning the 12 days of Christmas in reality lasts 12 weeks.
  2. 2. The UK’s household debt problem: Is there one? - and if so, who’s at risk? Richard Disney Institute for Fiscal Studies, & Centre for Finance & Credit Markets, School of Economics, University of Nottingham Presentation, IFS, January 24 th 2007
  3. 3. The UK’s debt problem? <ul><li>January is a time of short cold days, high winds… </li></ul><ul><li>… and also a time of media attention to households’ debt problems </li></ul><ul><li>What aspects warrant genuine concern about household debt in the UK? </li></ul><ul><li>Let’s look at: </li></ul><ul><ul><li>The aggregate data </li></ul></ul><ul><ul><li>Household data </li></ul></ul><ul><li>A new book on the economics of the consumer credit industry in Europe and the US… </li></ul>
  4. 4. <ul><li>The macroeconomic story… </li></ul><ul><li>Household debt in the UK has increased rapidly…both secured on property and unsecured… </li></ul><ul><li>But so have disposable income, assets, wealth… </li></ul>
  5. 5. Secured, rather than unsecured debt should be the current concern?
  6. 6. House price increases lead to extra secured debt (‘mortgage equity withdrawal’) with a time lag
  7. 7. But which are the households ‘at risk’? <ul><li>Examine data at the household level on: </li></ul><ul><ul><li>Use of credit arrangements by type </li></ul></ul><ul><ul><li>Households’ self-reported debt problems </li></ul></ul><ul><li>Evolution of household debt over time: </li></ul><ul><ul><li>How the pattern has changed over the last 5 years </li></ul></ul><ul><ul><li>Tracking individual households – the ‘life cycle’ of debt (and wealth) </li></ul></ul><ul><li>Few household data sets report debt – the Family and Children Survey (since 1999) is an ideal, random survey of a panel of (potential) ‘at risk’ households </li></ul>
  8. 8. Our previous research…. <ul><li>Research published in Fiscal Studies early in 2004 with colleague Sarah Bridges </li></ul><ul><li>Used the Survey of Low Income Families 1999: a sample of 5000 families with children: 50% lone parents, 50% low income couples (income not more than 35% higher than tax credit eligibility). </li></ul><ul><li>The survey was subsequently boosted to a include more representative sample of couples with children ( FACS ). </li></ul><ul><li>We update SOLIF families 5 years on (2004) using FACS: </li></ul><ul><ul><li>The same households (the ‘panel’) </li></ul></ul><ul><ul><li>Households with same sampling frame in 2004 as 1999 </li></ul></ul><ul><li>We look at how their debt situation has changed. </li></ul>
  9. 9. Our families in 1999* * That we also observe in 2004 Use of debt instruments 1999 Owners 42% Tenants 58% Averages Age: 37 % working: 0.63 No. of children: 2.1 (couples) % in couple:60% Averages Age: 34 % working: 0.33 No. of children: 2.2 (couples) % in couple: 40% Credit cards 54% Credit cards 15% Store cards 30% Store cards 8% Loans from finance co.s and banks 28% Loans from finance co.s and banks 23% Catalogue/mail order 49% Catalogue/mail order 57% Other 14% Other 26%
  10. 10. Owners in 1999 Use of debt instruments 1999 Remainowners by 2004 92% Credit cards Credit cards Store cards Store cards Loans from finance co.s and banks Loans from finance co.s and banks Catalogue/mail order Catalogue/mail order Other Other 56% 31% 29% 49% 14% 23% 14% 17% Become tenants by 2004 8% 38% 26% 45%
  11. 11. Owners in 1999 Use of debt instruments 1999 Remainowners by 2004 92% 33% 47% 15% 9% Credit cards Credit cards Store cards Store cards Loans from finance co.s and banks Loans from finance co.s and banks Catalogue/mail order Catalogue/mail order Other Other Use of debt instruments 2004 56% 31% 29% 49% 14% 23% 14% 17% Become tenants by 2004 8% 38% 26% 45% 64% 24% 17% 34% 8% 14%
  12. 12. Tenants in 1999 Become owners by 2004 21% Use of debt instruments 1999 Remain tenants by 2004 79% Credit cards Credit cards Store cards Store cards Loans from finance co.s and banks Loans from finance co.s and banks Catalogue/mail order Catalogue/mail order Other Other 26% 13% 25% 59% 21% 23% 14% 27% 10% 7% 56%
  13. 13. Tenants in 1999 Become owners by 2004 21% Use of debt instruments 1999 Remain tenants by 2004 79% 40% 25% 10% 16% Credit cards Credit cards Store cards Store cards Loans from finance co.s and banks Loans from finance co.s and banks Catalogue/mail order Catalogue/mail order Other Other Use of debt instruments 2004 26% 13% 25% 59% 21% 23% 14% 27% 10% 7% 56% 57% 17% 21% 42% 11% 23%
  14. 14. Summary on use of credit 1999-2004 <ul><li>Nearly 60% of our sample of families were tenants in 1999; by 2004 almost half were homeowners </li></ul><ul><li>Owners use credit cards more than tenants </li></ul><ul><li>From 1999 to 2004: </li></ul><ul><ul><li>Increase in use of credit cards among all groups </li></ul></ul><ul><ul><li>Especially among homeowners, and fastest among those who became homeowners in the period </li></ul></ul><ul><ul><li>Corresponding reduction in use of ‘inferior’ types of credit e.g. mail order, catalogues, ‘other’ (e.g. moneylenders, informal loans) </li></ul></ul><ul><li>Why more access to ‘superior’ types of credit? </li></ul><ul><ul><li>Our sample built up credit history and obtained credit score </li></ul></ul><ul><ul><li>Home ownership increased (improves credit score) </li></ul></ul><ul><ul><li>Increased market penetration and better credit scoring methods </li></ul></ul>
  15. 15. Household debt problems <ul><li>SOLIF/FACS asks a series of questions about household ‘debt’ problems. </li></ul><ul><li>Whether households are unable to make minimum payments on credit/charge/storecards </li></ul><ul><li>Whether households are unable to keep up with repayments on financial loans, in arrears on utility bills etc. </li></ul><ul><li>Total value of arrears (mostly on loans/bills) </li></ul><ul><li>Stress related to financial problems </li></ul>
  16. 16. Proportion unable to make payment on cards by household type 1999 3% Owners 1999 Owners 2004 10% Owners 1999 Tenants 2004 3% Tenants 1999 Owners 2004 7% Tenants 1999 Tenants 2004 1999
  17. 17. Proportion unable to make payment on cards by household type 1999 & 2004 3% Owners 1999 Owners 2004 10% Owners 1999 Tenants 2004 3% Tenants 1999 Owners 2004 7% Tenants 1999 Tenants 2004 1999 2004 1% 4% 1% 3%
  18. 18. Proportion unable to make repayments on loans by household type 1999 3% Owners 1999 Owners 2004 8% Owners 1999 Tenants 2004 5% Tenants 1999 Owners 2004 11% Tenants 1999 Tenants 2004 1999
  19. 19. Proportion unable to make repayments on loans by household type 1999 & 2004 3% Owners 1999 Owners 2004 Owners 1999 Tenants 2004 3% Tenants 1999 Owners 2004 7% Tenants 1999 Tenants 2004 1999 2004 1% 3% 1% 5% 8% 5% 11%
  20. 20. Proportion in arrears on at least one utility bill or council tax by household type 1999 17% Owners 1999 Owners 2004 27% Owners 1999 Tenants 2004 40% Tenants 1999 Owners 2004 11% Tenants 1999 Tenants 2004 1999
  21. 21. Proportion in arrears on at least one utility bill or council tax by household type 1999 & 2004 3% Owners 1999 Owners 2004 8% Owners 1999 Tenants 2004 5% Tenants 1999 Owners 2004 11% Tenants 1999 Tenants 2004 1999 2004 8% 17% 11% 5% 40% 27% 17%
  22. 22. Household debt problems <ul><li>Have reduced considerably as sample has aged 5 years </li></ul><ul><li>Least important debt problems (in incidence) arise from credit/charge/store cards </li></ul><ul><li>Debt problems are primarily associated with… </li></ul><ul><li>… being poor </li></ul><ul><li>Purchase of house carries risk of problems with utility bills & council tax </li></ul><ul><li>‘ Revolving arrears’ </li></ul><ul><li>Debt problems may also be associated with moving out of home ownership </li></ul>
  23. 23. A matched sample <ul><li>Previous results a combination of ‘life cycle’ and ‘time’ effects. </li></ul><ul><li>We can separate these by constructing a matched sample for 2004 with 1999 characteristics (i.e. not 5 years older) – (by deflating net incomes in 2004 sample by RPI and taking appropriate cut-offs): </li></ul><ul><li>Findings: </li></ul><ul><ul><li>Similar results in most cases </li></ul></ul><ul><ul><li>In 2004 less use of catalogues and mail order, and financial loans </li></ul></ul><ul><ul><li>Frequency of utility bill arrears increases slightly but not other financial difficulties. </li></ul></ul>
  24. 24. Priorities in policies towards household debt? <ul><li>Cooling-off periods for ‘store cards’? </li></ul><ul><ul><li>Store cards of declining importance? </li></ul></ul><ul><ul><li>Effective sharing of credit information should cap overall access to credit </li></ul></ul><ul><li>Banks are ‘too generous’ in offering credit? </li></ul><ul><ul><li>Arguably, the problem instead is that some households rely on ‘bad’ credit and need ‘good’ credit </li></ul></ul><ul><ul><li>Credit scoring is getting more sophisticated and this allows identifying of potential clients previously regarded as ‘bad risks’ </li></ul></ul><ul><li>Greater importance of secured debt? </li></ul><ul><ul><li>‘ puts house at risk’ </li></ul></ul><ul><li>Bankruptcy alternative – too tough, now too lenient?? </li></ul>
  25. 25. Low income households <ul><li>Size of ‘home credit’ and unregulated market – less clear from surveys. Our data suggest significant in 1999 but becoming less important over time? </li></ul><ul><li>Looser regulation than credit markets (Farepak) </li></ul><ul><li>Loans to finance shopping vouchers: APRs >400% are common – not regulated? </li></ul><ul><li>Lack of security/collateral leads to high cost ‘doorstep’ lending </li></ul><ul><li>Interest ceilings? OK if eliminates ‘excess’ APRs but issue is - how to price risk? Doorstep selling generates ‘captive’ clients? </li></ul><ul><li>Local credit unions are probably a much better alternative. But regulated sub-prime market provides a ‘route’ to a better credit score for households. </li></ul>
  26. 26. Many debt issues not covered in this talk An unashamed plug…. <ul><li>Surveys the economics of consumer credit </li></ul><ul><li>Empirical evidence on credit in Europe & USA </li></ul><ul><li>Secured & unsecured debt in UK </li></ul><ul><li>Bankruptcy </li></ul><ul><li>Credit cards </li></ul><ul><li>Credit industry: regulation, counselling </li></ul><ul><li>Formal and informal enforcement </li></ul>
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