By Daniel Hunter
The number of families in Britain with perilous levels of debt repayments could more than double to 1.2 million if interest rates rise faster than expected in the next four years and household income growth is weak and uneven, according to new Resolution Foundation analysis.
The figures suggest that the ongoing squeeze on households could leave Britain seriously exposed if interest rates were to rise faster than expected, resulting in levels of debt back at the heights last seen in the run up to the financial crisis.
The figures are contained in the first full analysis of how rising interest rates could affect families under different scenarios for the recovery in household incomes. They follow from the adverse but plausible scenario in which interest rates rise to 3.9 per cent by 2017 (two percentage points higher than current market expectations but still below typical long term levels) and household income growth is weak and uneven (lagging behind GDP growth and being skewed away from less affluent households).
Under this scenario:
- One in 20 households (5 per cent) would have perilous levels of debt in 2017, spending at least 50 per cent of their net income on repayments. This equates to over 1.2 million households, more than double the 600,000 (2 per cent) today.
- Among the poorest fifth of households, one in 14 (7 per cent) would have perilous levels of debt–higher than the 5 per cent today.
- 5.8 million households (21 per cent) would be ‘debt-loaded’, spending more than a quarter of net income on repayments (compared to 3.7 million — 14 per cent - today).
The scenario would see Britain return to higher levels of perilous household debt than those in 2007, just before the financial crisis. The number of households in ‘debt peril’ (spending more than half their net income on debt repayments) stood at 870,000 in 2007, just before the crash, but had fallen to 600,000 by 2011 as interest rates fell and households deleveraged during the recession.
While this is only one of the scenarios looked at by the Resolution Foundation research, it would have profound implications for households, banks and policy makers and for the wider economic recovery.
Although pessimistic over interest rates compared to current market expectations, it is still based on cautious assumptions, such as GDP growth rising in line with the OBR’s projections, household debt growing as expected by the OBR to around £2 trillion by 2017, and the spread between market interest rates faced by borrowers and the Bank of England rate falling halfway back to its historic level.
The figures reveal the impact of a rise in the base rate under these conditions.
The timely findings come as new Bank of England governor Mark Carney finishes his second week in the job. Carney has signalled an intention to hold down interest rates for longer than otherwise may have occurred–and today’s report confirms the risks of an early rise.
Yet with few able to say with confidence what interest rates will be in 2017, the findings also stress how little freedom for manoeuvre the Governor and Monetary Policy Committee may have if the squeeze on household incomes continues and external factors–or a domestically generated housing boom–generate pressure for higher rates.
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