Posted on Sunday 24 November 2013 by Ulster Business
Precious Plastic 2013, PwC's latest report on the consumer credit industry, published today, says that total UK household debt in 2013 rose by 4%, or £8.5bn to £316bn.
This is the first increase in unsecured debt since the onset of the financial crisis and means UK consumers are amongst the most indebted in the world, only surpassed by the USA and Canada.
However, PwC says that the entire £8.5bn increase is accounted for by a huge rise in student debt, with official data revealing that the average size of a student loan has increased by more than 2000% since the early 1990s and is now to close to £8000 today.
Stripping out student debt shows that underlying unsecured consumer debt actually remained flat in 2013 at around £5,900 per household.
That's a fall of around 25% since the start of the crisis in 2008 and shows that households are steadily paying off their debts.
Ian McConnell, PwC's financial services partner in Belfast said: "The average household has paid off a quarter of their debt since 2008 - that's a big milestone which suggests we are changing our ways and are focusing on paying off what we owe and saving more for the future.
"Although student loans are provided on very favourable rates and repayment terms, this significant increase in student debt is likely to have profound effects on graduates' future borrowing and consumption patterns.
"While Northern Ireland house prices are showing some signs or recovery, new graduates here don't face the same difficulties as graduates in Britain, where getting onto the property ladder is becoming difficult as house prices accelerate ahead of earnings.
"In London and other large GB cities we are seeing the erosion of the UK's home ownership culture and the rise of a new generation of long term renters, which in turn reduces the ability of graduates to take on unsecured debt.
"Ironically, economic recovery may bring further woe as falling unemployment could trigger bank interest rate rises earlier than expected, with a 1% increase in borrowing costs potentially costing local households an extra £550 annually."
Traditional forms of lending, which include credit cards, personal loans and overdrafts are continuing to decline, falling by around 1% in 2013, the report says.
In contrast, newer forms of borrowing, such as payday lending and peer-to-peer lending, rose by around 14%, but still represent a very small proportion (around 1%) of overall consumer borrowing.
Credit card write offs, which peaked in 2010 at £5.3bn, and represented close to 10% of outstanding balances, have fallen dramatically to less than 3.5% of outstanding balances in 2013, the lowest level in over a decade.
Ian McConnell said the sharp fall in credit cards write-off is an indication that consumers may have learned a hard lesson, but that new forms of borrowing are not without risk:
"Although still relatively small in the context of overall consumer debt, the continued growth in newer forms of borrowing highlights a shift in borrowing habits towards smaller and shorter term loans.
"Pressure on larger mainstream lenders to provide these types of lending products is likely to increase over the coming months and years.
"However, debt of any kind is easier to incur than to repay and consumers need to be certain of their ability to service short-term lending as well as longer term debt."
The PwC credit confidence survey of more than 2,000 suggests that consumers remain relative downbeat about their personal economic prospects.
More than a quarter (26%) of respondents are worried about their ability to meet repayments in future as compared to 27% in 2008, while 34% in 2013 expect their pay to be frozen in the next year, as compared to 28% in 2009.
And when it comes to the threat of redundancy, 15% of respondents in 2013 are worried about losing their job in the next year, only slightly down on the 18% in 2008 who feared impending redundancy.
On a more positive note, the overall number of people needing to use credit for essential items has fallen to 13% (compared to 15% in 2011), and among 25-34 year olds the number has fallen from a staggering 26% in 2012, to 15% this year.
However, UK householders remain vulnerable to rate rises. PwC calculated that, all other things being equal, a 1% increase in borrowing costs would result in the average household needing to pay an extra £550 a year in interest payments to service their debts.