Kings of binge set for a fall
When it comes to debt, the British are the kings of binge. British debtors now owe the equivalent of UK GDP and their debts are much more sensitive to interest rate rises than US consumers'. Two-thirds of US borrowing is at fixed rates; almost 90% of secured UK household debt - mostly mortgages - is at variable rates. And UK rates have begun to rise.
Only the most pessimistic fear another housing crash, as in 1990-91, when the rest of the economy was dragged into recession. Still, the similarities between today and the 1988-89 period are striking. Then, as now, the housing market was booming, the economy looked set for a soft landing and there were rifts between the prime minister and the finance minister. Then, as now, house valuations were peaking at about 5.5 times average earnings, and it was a time of easy mortgages. And then as now homeowners were borrowing record amounts against the inflated value of their homes to pay for consumer goods. Mortgage equity withdrawal hit a 30-year high of 7% of post-tax income in mid-1988. It's almost at that same level now.
|UK lending (£bn)|
|Source: Bank of England|
The supposed redeeming difference between then and now is the much lower interest rates.