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John Simkin

Household Debt

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British householders now have debts of £1 trillion. This is an average of £17,000 for every man, woman and child. This is an amazing figure and far higher than any other country in the world. At 1 trillion, it is only slightly smaller than the £1.1 trillion output of the whole UK economy.

It took 600 years of banking history for the UK to reach half a trillion. This figure has doubled in 7 years of Tony Blair’s government. Interest repayments account for about 20% of all spending. The growth in the British economy has been fuelled by credit. Can this be sustained?

Householders have been willing to buy so much on credit because the last few years have seen a dramatic increase in the price of their houses (60% in real terms over the last nine years). Over the last year they have gone up by 20%.

Will this continue or are we about to see a dramatic fall in house prices? Last week the National Institute for Economic and Social Research claimed that house prices are around 30% over-valued (this is based on the relationship between family income and house prices).

What will cause house prices to fall. Most economists believe this will be triggered off by an increase in interest rates. Since last November, interest rates have gone up from 3.5% to 4.5%. According to the National Consumer Council around 6 million families are currently struggling to keep up with credit repayments. Yet interest rates increases are forecast to go up steadily over the next two years. Are we once again going to experience a dramatic fall in house prices. If so, it will have a devastating impact on spending and could result in a recession. As we all know, the government no longer controls interest rates. What will Gordon Brown be able to do when houses prices begin to tumble?

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