Household Debt Explained? Personal Consumer Debt and its Relationship with Arrears Max Griffiths, Alliance & Leicester
Agenda Macro-economic trends Key changes Household balance sheet Household balance sheet and arrears Possible uses of the household balance sheet in decisioning Conclusions
2005 Q1 20 Q1 20 Q3 2003 Q3 2003 Q1 2002 Q3 2002 Q1 Rapid house price growth Average UK house price 180,000 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 1995 Q1 1995 Q3 1996 Q1 1996 Q3 1997 Q1 1997 Q3 1998 Q1 1998 Q3 1999 Q1 1999 Q3 2000 Q1 2000 Q3 2001 Q1 2001 Q3 Source: Halifax House Price Index
Interest rates at historically low levels Bank of England Interest Rate 8 7 6 5 4 3 2 1 0 May-05 Jan-95 May-95 Sep-95 Jan-96 May-96 Sep-96 Jan-97 May-97 Sep-97 Jan-98 May-98 Sep-98 Jan-99 May-99 Sep-99 Jan-00 May-00 Sep-00 Jan-01 May-01 Sep-01 Jan-02 May-02 Sep-02 Jan-03 May-03 Sep-03 Jan- May- Sep- Jan-05 % Source: Bank of England
Significant growth in consumer spending Total household expenditure 200,000 180,000 160,000 140,000 120,000 100,000 80,000 millions 60,000 40,000 20,000 0 1995 Q1 1995 Q3 1996 Q1 1996 Q3 1997 Q1 1997 Q3 1998 Q1 1998 Q3 1999 Q1 1999 Q3 2000 Q1 2000 Q3 2001 Q1 2001 Q3 2002 Q1 2002 Q3 2003 Q1 2003 Q3 20 Q1 20 Q3 2005 Q1 Source: Office For National Statistics
Large rise in personal consumer debt Total consumer lending 1,200,000 1,000,000 800,000 600,000 400,000 Total secured lending Total lending Total unsecured lending 200,000 0 Mar-95 Sep-95 Mar-96 Sep-96 Mar-97 Sep-97 Mar-98 Sep-98 Mar-99 Sep-99 Mar-00 Sep-00 Mar-01 Sep-01 Mar-02 Sep-02 Mar-03 Sep-03 Mar- Sep- Mar-05 millions Source: Bank of England
Are these levels of debt sustainable? Debt Repayments as % of Income 10% 9% 8% 7% 6% 5% 4% % of Income 3% 2% 1% 0% 2005 Q1 1995 Q1 1995 Q3 1996 Q1 1996 Q3 1997 Q1 1997 Q3 1998 Q1 1998 Q3 1999 Q1 1999 Q3 2000 Q1 2000 Q3 2001 Q1 2001 Q3 2002 Q1 2002 Q3 2003 Q1 2003 Q3 20 Q1 20 Q3 Source: Office For National Statistics
Is the debt being repaid? Change in Unsecured Arrears 10.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 Jan-97 Apr-97 Jul-97 Oct-97 Jan-98 Apr-98 Jul-98 Oct-98 Jan-99 Apr-99 Jul-99 Oct-99 Jan-00 Apr-00 Jul-00 Oct-00 Jan-01 Apr-01 Jul-01 Oct-01 Jan-02 Apr-02 % Total Arrears Jul-02 Oct-03 Oct-02 Jan-03 Apr-03 Jul-03 Jan- Apr- Jul- Oct- Jan-05 Apr-05 Source: Finance & Leasing Association
Is the debt being repaid? Change i n M or t gage Ar r ear s 3.0% 2.5% 2.0% 1.5% s 1.0% 0.5% 0.0% 1997 H1 1997 H2 1998 H1 1998 H2 1999 H1 1999 H2 2000 H1 2000 H2 2001 H1 2001 H2 2002 H1 2002 H2 2003 H1 2003 H2 20 H1 20 H2 2005 H1 Source: Council of Mortgage Lenders
So all is well then..? some tightening of lending spreads RBS Interim Results 2005 a slight deterioration in asset quality A&L Interim Results 2005 HSBC responded to the trends in delinquency by revising its credit scorecards, adopting positive credit reference agency data, further centralising underwriting, strengthening collections capabilities and adding resource to its retail credit function Last year we reported on the necessary steps taken to tighten lending criteria across our unsecured lending HSBC Interim Results 2005 with personal loans key initiatives have been increased use of behavioural scoring and risk based pricing HBoS Interim Results 2005 LTSB Interim Results 2005
House Price Growth Slowing Source: BBC News website
Economic environment is changing Bad debts in unsecured lending sector appear to be rising will secured debts follow this trend? Consumer boom is fading A slowdown in the UK economy with GDP year-on-year growth at 1.7%, the weakest rate since Q1 1993 The number of homes being repossessed has risen for the first time in seven years (Council of Mortgage Lenders, July 2005) The number of individual insolvencies in England and Wales soared by an annual 37% in Q2 2005 (Department of Trade and Industry, August 2005)
Media Interest
What does the data say? Completed Mortgage applications from H1 2003 were tracked over 2 years Tracking period covers periods of house price growth and stability Balance sheet = + Indexed House Value (adjusted by HHPI) - Unsecured Debt (Experian s DCM value) - Secured Debt (Mortgage Balance) The balance sheet is an estimate of the liquidity of household The constituents of the household balance sheet and arrears were monitored at regular intervals Arrears measures: CAIS 2+, A&L Mortgage Arrears and A&L Customer Level Bad Rates
Average Household Balance Sheet Mean balance sheet follows house price growth 120,000 180,000 100,000 160,000 140,000 Balance Sheet ( ) 80,000 60,000 40,000 120,000 100,000 80,000 60,000 Average House Price ( ) 20,000 40,000 20,000 0 Sep- 03 Oct- 03 Nov- 03 Dec- 03 Jan- Feb- Mar- Apr- May- Jun- Jul- Aug- Sep- Oct- Nov- Dec- Jan- 05 Feb- 05 Mar- 05 Apr- 05 May- 05 0
But the average picture hides some stress 400,000 350,000 300,000 250,000 bottom decile 200,000 mean top decile Balance Sheet ( ) 150,000 100,000 50,000 0 Sep-03 Oct-03 Nov-03 Dec-03 Jan- Feb- Mar- Apr- May- Jun- Jul- Aug- Sep- Oct- Nov- Dec- Jan-05 Feb-05 Mar-05 Apr-05 May-05
Household Balance Sheet and Arrears aver age bottom quintile second quintile thir d quintile f our th quintile top quintile Bottom quintile shows 97% growth in bad rate, compared to 48% overall and -9% for the top quintile Rise in arrears coincident with slowing house prices and rising interest rates So poor balance sheet at the start of the relationship gives an increased likelihood of arrears no great surprise
Household balance sheet and A&L mortgage arrears Also true for A&L mortgage arrears and aver age bottom quintile second quintile thir d quintile f our th quintile top quintile 03 03 03 03 Mar - Apr - 05 05 Mar - 05 Apr - 05 Sep- Oct- Nov- Dec- Jan- Feb- May- Jun- Jul- Aug- Sep- Oct- Nov- Dec- Jan- Feb- May- 05
The impact of keeping up with the Joneses What if you built up debt in a period where house prices were growing? bad rate 6 12 18 22 24 26 months since account opened balance sheet less than 10k at 6 months average balance sheet less than 10k at 6 months and 10k plus at 18 months balance sheet less than 10k at 6 months and less than 10k at 18 months balance sheet between 10k-60k at 6 months and less than 10k at 18 months balance sheet between 10k-60k at 6 months and 10k plus at 18 months
A Sticky Situation for the Jones Neighbours 82% of households with a balance sheet less than 10k through first 18 months (house price growth) remain there after 26 months Of those which have a balance sheet of between 10k-60k at 6 months and then reduce their balance sheet to less than 10k by 18 months, 73% will still have a balance sheet less than 10k after 26 months
Possible Uses of Household Balance Sheet Household balance sheet is predictive of poorer credit performance Does it add value at the application stage for mortgage scoring? What about behavioural scoring? Portfolio assessment? Collections Strategies?
Behavioural Scoring B ad rat es f o r B alance Sheet quint iles 0 1 to 3 4 to 6 7 to 9 C ust omer R isk Grade bottom decile top decile aver age
Conclusions Household debt and, more importantly liquidity, are predictive of future arrears Currently the groups under stress are relatively small Most homeowners have benefited from low interest rates and house price growth Some have used a period of house price growth to spend these people are now having more difficulties repaying their debts Will reducing interest rates and possible further house price growth enable major issues to be avoided?