It’s the type of debt that matters
It does not matter that we all have an average debt of £33,000, as PriceWaterhouseCoopers calculates. In does not necessarily matter that the figure has doubled over seven years. What matters is what form that debt takes.
If your neighbour owes £33,000 on his credit cards he should be worried. If, instead, he has a £33,000 mortgage he is probably the most prudent borrower in the street.
The credit card bills suggest the neighbour is living beyond his means; the mortgage could be the normal way to put a roof over the family’s head. The credit-card balance has probably financed consumption; the mortgage looks like investment. And the mortgage borrowing is asset-backed.
Think of that debt in corporate terms and see the difference between an overdraft financing trading loses and a term-loan financing a new factory.
Actually, £33,000 per adult, although it adds up to the GDP of the country, is quite modest gearing. (And comparing a liability balance with an annual national income is another bit of apples and pears that merely tells us we have borrowed once-times our income.) Given the average house price is over £200,000, Britain is barely leveraged.
Except that these are averages. A quarter of the population does not own a home. Many householders have no mortgage. But some have loan to value rations approaching 100 per cent – or more. And some people do have credit card bills greater than their annual income.
Throw the bad cases into the current perfect storm of bad news and we will see cuts in spending to meet higher interest bills, more defaults, more repossessions resulting in falling house prices that reduce consumer confidence that hits sales, and profits. This is the credit-crunch hitting the high street, but £33,000 of debt by itself, is not the problem.
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