The stocks and the flows

There have been calls for interest rate rises to discourage risky new lending. But the Resolution Foundation shows that it is the stock of existing debt that is the real problem. Household debt still stands at over 90% of GDP, and many of these households already have difficulty paying their mortgages: there is a real risk that raising interest rates would make their debts unaffordable, forcing them into default and the economy into recession. The Resolution Foundation has important recommendations for policy makers to reduce the risks of interest rate rises. But they don't go quite far enough....

Find out more here. (Pieria)


  1. From the article:

    > It is simply ridiculous to assume that nearly a fifth of all households with mortgages borrowed irresponsibly.

    Is it? It might be wrong, but UK housing has been in a debt-funded speculative boom for about 15 years now, with government and the media all pushing the idea that it's a one-way bet, and ensuring that with taxpayer money where necessary. Why is it ridiculous to imagine that a lot of people have been pushed into borrowing irresponsibly before they were "shut out for ever"?

    > But the rest have simply been victims of circumstances. Do they really deserve to lose their homes?

    A foreclosed home doesn't just vanish in a puff of smoke. It becomes available for somebody else to live in. Why don't they deserve to have a home? Why is one side of this equation deserving of endless support and forbearance and the other ignored altogether?

    > It seems likely that if base rates had remained at the level they were in 2007 – or worse, at the level they were in 1991 at the height of the last mortgage crisis – mortgage payment difficulties would be even more prevalent.

    Or maybe they wouldn't, because those having trouble now would have sold up or defaulted, and new mortgages wouldn't be mispricing risk with a clear demonstration in the rear-view mirror.

    1. 1) The evidence does not support your argument that a high proportion of people were pushed into borrowing irresponsibly. Take a look at the affordability chart. Far more people are struggling to pay their mortgages now than were prior to the crisis, even though rates are far lower now than they were then. This indicates that many people's affordability problems are due to change of circumstances, not irresponsible borrowing.

      2) People whose homes are repossessed still have to live somewhere, so although *that* house is released for someone else to live in, overall repossessions make no difference to housing availability. They do make a difference to finances in other sectors, though: the anxiety caused by debt and repossession makes people ill, which affects the NHS budget: and when families with children or vulnerable adults end up homeless because of repossession, the local authority has a duty to re-house, which may overall end up more expensive than supporting them to remain in their homes. The Resolution Foundation discuss this "ledger effect" in their report.

      3) Yes, more people would have defaulted. But more people OVERALL would be in difficulty, and many of those would not default - they would make extraordinary sacrifices to maintain their mortgages. However, as the higher level of defaults would force down prices, there would be a far higher number of people in negative equity, and negative equity STOPS people selling up. So I would expect the number of people struggling to be higher than it is now, and house sales might actually have fallen (as they did in the US).

    2. Thanks for the response.

      1) I'm not actually arguing that; I'm just not convinced that it qualifies as "simply ridiculous". And while "struggling" numbers are certainly suggestive, I don't think they necessarily prove what you say they prove. "Responsible borrowing" should arguably include allowing for the possibility of a change in circumstances. Some of the newly-struggling might have mortgages taken out since the crisis, especially with the insane panic buying in London over the last few years. And some of the change might be due to the lower availability of interest-only mortgages these days; they were always irresponsible IMO, but are much easier to service. Or MEWing to compensate for real income falls. (Does MEWing still happen?)

      2) Good point about knock-on effects on the NHS. I wouldn't be surprised if the stress contributed to household breakup too, increasing housing demand at the worst possible time. Note though that in your homelessness example eviction must by definition have an effect on overall housing availability; if I become homeless through eviction then my home, or something in a chain with it, becomes available to house somebody who was previously homeless.

      To your "overall repossessions make no difference to housing availability" - no, but they do shuffle housing around so that people can afford to live where they do, through downsizing and price falls if necessary. Is that not a good, not to mention more economically resilient, outcome?

      I can't help feeling that the underlying drivers here aren't so much the kind of second-order impacts you describe as loss aversion and the endowment effect: it's more painful for "haves" to lose than it is for "have-nots" to not gain. It's not surprising that public policy generally panders to that, especially since policy is invariably made by the "haves", but that doesn't make it right.

    3. 1) It's not reasonable to expect people to take into account the possibility of the deepest recession since the 1930s and six years of high unemployment, under-employment and falling real wages. No-one was expecting that. Not even you.

      The tightness of credit since the crisis makes it highly unlikely that it is new borrowers who are struggling. And the London housing market is driven mainly by cash buyers: even Help to Buy is not a significant contributor to house price rises in London. Interest-only mortgages have actually been rather prevalent since the crisis, since they are a form of forbearance.

      2) Your maths is wrong. If I am made homeless through eviction, and a homeless person is housed in my former house, there is still one house and one homeless person. Housing availability has not changed.

      Shuffling housing around through mortgage defaults, evictions and repossessions is expensive, inefficient and has serious impacts on family cohesion and social structures. It is NOT a good way of improving housing allocation.

      I don't see this as haves versus have-nots. High levels of mortgage defaults and repossessions drive the economy into recession, which benefits absolutely no-one.

  2. 2) My maths is fine. A becoming homeless produces +1 available home, which is what allows currently-homeless B to become housed. My point was that your discussion of this *only* considered the (very negative) effect on A, completely ignoring the (very positive) effect on B. It's as if B is invisible, so any benefits to them don't count. You talk about the cost to government of needing to house people who become homeless but, as you say, the number of homeless people is unchanged in this scenario.

    You've clearly written me off as a callous cold-hearted tub-thumbing brute. And maybe you're right; I don't know. As a lifelong debtophobe I'm certainly angry as hell at the relentlessly pro-debt thrust of policy over the last decade, and I'm sure that affects my judgement in ways it shouldn't. But I don't have any problem with your sympathy for those in trouble through no fault of their own. It was that sympathy, backed by well-informed and readable economic analysis, that drew me to read this blog in the first place. I'm just struck by how selectively it gets applied.

    1. I think you are being more than slightly unfair. THIS POST is about high levels of household debt and the risk of ill-judged interest rates causing households to cut back spending severely and higher levels of defaults. The risk is to the whole economy - including people who don't own houses. In fact people who don't own houses are actually at even higher risk, because they are generally at the poorer end of the income spectrum and when the economy slumps it is the less well-paid jobs that tend to go first. I'm simply astounded that you see me as somehow uninterested in the plight of the homeless. Did you not read the post in which I suggested there should a large increase in social housing? I cannot cover everything in one post.

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