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UK household debt

Here is the story of my financial ruin

Posted by: Bretton, March 4, 2010.

Here is the story of my financial ruin; a story writ large in most media analysis of the nation's fortunes.

Aged 13, I owed perhaps £1 to my brother. Today, my debts are in six figures.

How I am humbled, obviously. From that simple summary you perceive at once the explosion of my borrowing and thus the extent of my penury. As a teen, I was fiscal rectitude personified. A mere £1? How prudent. Today, I am ruined.

But wait. I hear your objection. My calculation is foolish, innumerate, you say. It considers only half the balance sheet, the bad half - like Enron in reverse.

For example, did I own anything of value aged 13? The T-Rex single was scratched, after all. How far did the income from a paper-round stretch? And how does this more rounded view of my financial circumstances then compare with now?

These other factors - assets and income - might together mean that I am not worse off but incomparably richer than in youth, the big bang of my debts notwithstanding. To use another metaphor, taking the measure of my finances from only one side - the debt - is to sit me on a one-legged stool. Naturally, I appear to fall off.

Your criticisms are fair, I say. But I am merely aping journalistic and economic fashion. I am ruined. I insist upon it. Why, simply look and weep at the zeros on my mortgage.

Follow almost any economic coverage today and you find reams about debt. Last month, a business consultancy added up all the debt held by households, governments and firms. In a selection of economies, the UK was top of the list, the most indebted of all. This was well reported, the talk of the Davos economic forum.

But in this recent interest in debt, has there been any serious analysis of assets?

None worth the name that I saw.

Isn't that a little odd? Curious to know what it might say, I undertook extensive research into one part of the calculation - that is, I googled "OECD net household wealth".

The very first result was an edition of OECD Outlook that offered some tables, one of which was for net household wealth - that's after the deduction of debt - and measured the same way that debt is often measured, as a percentage of disposable income. Here in the graph is what it showed up to 2007, the last year for which this source offered full data.

The country in the G7 group of rich nations with the highest household assets as a multiple of income in 2007, as calculated by the OECD, even after taking account of all household debt, was the UK.

Some mistake, surely. For now the problem becomes less clear cut. Why were UK households so asset rich by international standards, relative to income? The same data suggests an answer. Partly, they owned a lot of shares, and for all that we are worried about pensions in the UK, our pension funds compare well with our international friends. UK households also own a lot of houses.

Another quick search. Curious to see the trends in home ownership in the UK, I turned to the National Statistics website, typed "tenure" and had the answer in about a minute - roughly 1.3 million more homes than 10 years ago.

If each of those required a mortgage of £10,000 (a modest assumption), we have added debt of £13bn. If a mortgage of £100,000, we have added £130bn to the UK stock of household debt. Now we are talking big money.

Real problems

But is this purchase of their own homes by households using mortgages necessarily a bad thing? Can we, should we, count £130bn in this case - or whatever the true figure - an unequivocal signal of financial doom? If not, why is it reported as such?

All in all, I feel somewhat puzzled. Perhaps I am not ruined after all. Perhaps readers will think of their own circumstances and conclude likewise, though a few will also no doubt have real problems with debt.

But doesn't it make a difference if the debt is backed by an asset, or rather, if the debt is backed by assets which far exceed the debt, exceed it indeed by more than in any other country in the G7 relative to income? None of us would look at our own debts without taking account of our assets, nor any business.

Debt and assets are often sides of the same coin. The data is far from perfect, but it is instructive - and easily found. This whole exercise took perhaps 15 minutes.

I make no pretence that these snippets tell us all we want to know about the economic well-being of the nation. It is hard to say meaningful things about the assets of the Government, for example, in relation to its debts. I certainly do not argue that the UK government's regular borrowing is trivial, far from it.

What economists refer to as the structural deficit is a monster of a problem, perhaps underestimated - though not the same problem as the national debt. Nor is this short observation of household debt any guide to the position of the business community.

And of course it will be argued that recent falls in house and equity prices have wiped out some of the positive balance of household assets, even if they are now rising again. But how much? The full balance sheet matters.

So a plea to commentators and analysts - that they distinguish one variety of borrowing from another, that they balance debt against assets or income, as every fledgling accountant learns.

In our current state of mind it is all one - a great pit of homogenised ruin in which Government, people and firms languish equally. That analysis could be improved, first and foremost by removing the strange assumption that we can know anything useful from only one side of a balance sheet.

The point is trivial but it seems that it has to be made. As a 13 year old, the modesty of my £1 debt did not make me affluent. As a six-figure borrower, I am not necessarily heading for the Clink.