Put alarmist debate on debt into context

In: Uncategorized

4 Dec 2006

There follows a comment by me on household debt from the 4 December issue of Fund Strategy.

Tucked away in the latest issue of a dusty journal lies a healthy corrective to the often hysterical discussion of household debt. An article in the Organisation for Economic Cooperation and Development’s Economic Outlook shows the debt situation is not nearly as serious as is often assumed.* To the extent it could become a problem, it is likely to be because of broader economic factors rather than the debt situation in itself.

Most sensationalist coverage of household debt follows a similar pattern. It starts with sensational-sounding figures on the size of the debt burden. Often it claims that debt levels are at an all-time high. Rarely is the discussion of debt put into its proper context.

For example, the fact that debt is at record levels reveals less than it seems. As the economy grows it is unusual for many indicators not to be at record levels. Economic output is usually at its highest level ever, corporate profits are generally at record highs and the economy is often more productive than ever.

Nor are figures on their own particularly revealing. The claim that personal debt in Britain is growing by £1m every four minutes sounds impressive but says little. How many people is this debt burden spread across? How high are their incomes? What assets do they have?

As with most statistics, skill is needed to ensure that comparisons are meaningful. For instance, looking at debt levels relative to GDP in an international or historical context makes more sense. It is also instructive to compare debt levels to levels of household assets. That way the overall health of household balance sheets can be properly examined.

The OECD makes several useful points to put the debt discussion into context:

* Favourable financial conditions and buoyant housing markets have bolstered household debt. In addition, financial liberalisation has meant that credit has become more widely available.

* Household wealth has risen sharply as a result of higher property values and a stockmarket recovery. In addition, home ownership rates have increased, so debt is spread across a larger number of people.

* Although debt service levels have risen, mortgage delinquency rates have trended downwards over the past decade.

* Surveys show that most debt is held by households better able to manage it.

None of this means that debt could not become a problem but if it does so it is likely to be because of broader economic factors.

Higher interest rates, falling house prices and drops in income could all turn debt into a serious economic problem. But at present, for the economy as a whole, the burden looks manageable.

* Available at www.oecd.org

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