Is there a storm coming?
I see a financial storm coming, the severity of which I cannot predict – a strong gale or a cyclone?
Whichever it is, I don’t see anything other than a difficult few years ahead for those UK consumers with debt. This will not be a 2008 global liquidity crisis scenario or a run on the banks but a coming together of number of facts, actions and circumstances. What will these be? Let me share…
A credit boom
A credit boom that is close to levels not seen since the 2008 financial crash has been slowly happening for some time now. Bank of England figures recently showed that unsecured consumer credit, which includes credit cards, car loans and second mortgages, grew by 10.8 percent to £192.2bn in the year to November 2016.
Credit card debts, which accounted for £66.7bn of the total, hit a record in January as Britons used the plastic to fund shopping as never before in the run-up to Christmas. I have not been able to find up-to-date figures but I would speculate that we are approaching that 2008 level of debt – which hit a peak of £208bn.
Brexit, inflation and real wages
The vast majority of us are getting poorer. Inflation is raging away at 2.9 percent on the back of the Sterling devaluation following the Brexit vote. As the value of the pound has plummeted, so has the cost of our shopping, holidays, clothing and transport costs. Real wages are decreasing.
Since the financial crisis wage growth in the UK has been the lowest in G7 nations. Polish wages have grown by 23 percent, German wages by 14 percent and French wages by 11 percent, while UK wages have fallen in real terms by 10.4 percent. The UK, Greece and Portugal were the only three OECD countries that saw real wages fall. That is the highest fall in living standards since the 1870s, when Queen Victoria was on the throne.
Interest only maturity peaks
We are heading into the ‘peak interest only mortgage maturity’ period, which tops out in 2020. 1.8 million home owners (excluding buy to let investors) have interest only mortgages. How many of these mortgages have repayment vehicles in place?
The FCA also launched its third review into the BTL sector in just five years in May. It unveiled the latest thematic review in its 2017/18 business plan – could this review leave many IOM customers hamstrung and unable to remortgage away from expensive loans due to tightening on lending criteria?
The Bank of England Base Rate is also a big risk to IOM mortgages – from a historic perspective some of the biggest losses on mortgage lending have been associated with interest-only products. There is quite a lot of evidence that the type of people that would take out an IOM mortgage would typically be pushing the envelope on credit in other areas as well – these customers will surely be more susceptible to rate rises?
I would love to be more optimistic about what lies ahead for the average UK consumer of credit, but I find it increasingly hard to see how we will be able to avoid another (albeit different) financial crisis against such an overwhelming body of evidence.
The only upside, and I should have declared this an interest at the start perhaps, is that being a debt and asset recovery lawyer, I could be very busy.