The Debt Bubble? Looking beyond the headlines
2020 has been a year of numbers. None more so than in the mortgage world or wider economy and specifically in the level of extra debt taken out. We’ve pulled out a few key stats below and looked a bit beyond the headlines to try and draw conclusions on what this all means
Mortgage Holidays have equated to about £10bn of new lending and counting!
By April, a staggering 1.8m people had taken payment holidays when they were being offered from mortgage lenders. By October that had dropped right down to 150k.
Were so many needed? Probably not, but who would blame you for taking a ‘safety first approach’ when the pandemic hit. Whether you then repaid the money, saved to get back on track, or get new windows fitted, was a personal choice.
The net result however is that from granting these holidays, that equated to around £10b of new lending, which mortgage lenders will then charge interest on (for up to 40 years), is starting to look like good business from the lenders point of view.
Around £8b has been put aside in savings this year
Closely linked to the above, banks have seen in influx of cash savings (so not investments like ISA’s/Bonds/Stocks/Pensions etc). The figure is suspiciously close to the level of extra borrowing created on mortgages, perhaps a coincidence…? It seems people weren’t just stockpiling Andrex back in March.
Spending down 42% on cards (52% if you factor in cash)
Quite a frightening stat on how much spending on the high street had pulled back during lockdown 1.0. By November that had pulled back to just 8% down year on year, so it is then no surprise to see some of the large retailers have the issues they have had as that level of decline has never been recouped.
Jeff Bezos being the big winner as consumer behaviour has switched so quickly to home deliveries as we are home a lot more after all! Retailers have described the change in behaviour as a ‘decade of change in 6 months’. I am sure Zoom would agree with that sentiment.
House prices are up 7% and climbing
This is the shock stat of the year to date, and the year isn’t over yet! Is it highly conceivable that annual house price growth could touch 10% by year end.
Again, cast your mind back to the depths of the first lockdown and most analysts predicted house price falls of up to 20%. As a result, lenders pulled back from offering mortgages to those with smaller deposits/equity. We are seeing a resurgence in lenders coming back to offering mortgages to those with 5/10/15% deposits but certainly at a healthy premium.
There is undeniably some trepidation around Brexit and what impact that may have on 2021, but at least for Q4 this year, and Q1 next year, there is such a huge pipeline of mortgage applications that house prices are destined to go up in the short term.
At the time of writing, Boris Johnson was having dinner with Ursula von der Leyen to try and resolve Brexit. Given Mr Johnson’s proclivities, the outcome of that dinner is a huge question mark. But whatever the ultimate outcome of Brexit is, that will be the main factor of whether house prices continue to rise well into 2021, or if they level off as expected, or fall back given a ‘no deal’ scenario. So don’t be surprised to see house prices go up in early 2021 whatever the outcome of Brexit, it is the sustainability of that growth that will be determined by a trade deal, or not, being agreed.
Mortgage lending records will be broken in Q4 this year and most likely Q1 in 2021
Halifax have had 9 of their best 10 months in new applications EVER in 2020 (the only other top 10 month not in this year being July 2019, and again, the year isn’t over so it will be interesting to see how Nov/Dec fare). As above on house prices, no one expected that. As one of the UK’s largest mortgage lenders that is a very good barometer of the market.
Government Borrowing and National Debt reaches new highs
The trend isn’t a surprise as national debt passed 1 trillion (yes you read that correctly) back in 2012 and shows no sign of stopping as we have been in deficit ever since. The only surprise is the rate of recent rises. In October alone the UK Government borrowed £22.3 billion (or the GDP of the entirety of Trinidad and Tobago for context). Again for context, the below graph when updated for this years figures will resemble that of the 1940s… without a Spitfire to show for it…
Source: Office for Budget Responsibility
So what does this all mean?
Whichever way you look at it, we have unprecedented levels of national and personal debt, so it will be a very, very, very long time before we see any meaningful rise in interest rates. If we see any at all.
That is also on the presumption we see a positive (or at least clear) outcome to Brexit. A ‘no deal’ Brexit could see us fall into negative interest rate territory, which again, is unprecedented in the UK. The biggest issue is we just don’t know. A ‘good’ outcome to come Brexit could see house prices rise in 2021. A ‘bad’ outcome could see house prices and interest rates both fall.
As consumer confidence is the biggest driver on both these factors, sadly we’ll have to wait and see how things will go and how this influences levels of debt. Even those factors notwithstanding, we are well into an era of ultra-low interest rates which are set to stay for at least a generation and possibly much longer.
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