Credit card write-offs

In the third quarter of this year, UK banks wrote off ₤875 million worth of credit card debt. During the last five and a half years, about ₤13 billion had to be written off.

Household debt distress has been around for quite a while, yet the Banks kept on lending. The profits from those who paid their credit card debts outweighted the losses from those who didn't.

Building societies begin to shrink

Today, the guardian reported:

Mortgage lending by the UK's building societies has slumped by more than £1bn, according to new home-loans data. Building societies advanced net loans of just £580m in March, down from £1.8bn in the same month last year.

The 68% decline means that building societies are scaling back lending as a result of the credit crunch even more severely than major mortgage bank rivals, such as Halifax and Cheltenham & Gloucester.

An unsurprising story; building societies were always more susceptible to the credit crunch since they had a smaller depositor base and a greater dependence on wholesale financing.

For the same reasons, building societies are the weakest link in the UK banking system. Although the BoE have never stated this publicly, the Special Liquidity Scheme was almost certainly designed with them in mind.

Every move you take

...I'll be watching you.

UK banks get the message

UK commercial banks have finally woken up to the credit card debt crisis. For the last year or so, they have been quietly tightening lending standards. The new regime seems to be working. The stock of outstanding credit card balances is beginning to fall from its peak back in Christmas 2005. Since then, credit card balances have fallen by around 5.9 percent. Nevertheless, the stock of outstanding credit card debt in October 2007 was six times higher than in January 1994.

However, Britain's debt addicted credit junkies have gone elsewhere for their fix. Britain's debtors have moved onto the harder stuff. Unsecured loans and home equity withdrawal facilities have never been more popular. Personal sector debt has kept on rising. It is just isn't being charged to the plastic with the same reckless abandon.

Personal debt - a national affliction

When it comes to unsecured debt, the British are the champions of Europe. According to Datamonitor, individuals in the UK have an average of £3,175 ($6,223) unsecured debt, more than double that in the rest of western Europe. Furthermor, the UK now accounts for a third of all personal debt on the continent.

Despite these staggering levels of debt, UK banks seem unconcerned about rising levels of personal indebtedness; at least until the credit crunch rolled into town.. In recent years, personal bankruptcy in the UK has rocketed (see chart above). Last year, over a 100,000 people entered into Individual Voluntary Arrangements (IVAs) – the British equivalent of personal bankruptcy, forcing lenders to write of £1.4bn of bad debts.

Meanwhile, the total stock of UK mortgages now stands at over £1 trillion; a figure that has risen by over 24 percent compared to last year. Taking mortgage and unsecured debt together, this means that every man, woman and child in the UK owes an average of £21,000 ($41,660).

This rising stock mortgage debt has not been accompanied by a similarly rapid rise in personal income. Moneyfacts, the financial information company, said that on average mortgage payments account for 24 percent of people's pre-tax salary today. In 1996, just 16.5 percent of households' salaries went on mortgage repayments. The situation for first-time property buyers, is even more desperate. Mortgage debt accounts for nearly 27 percent of first-time buyers' salary compared to 18 percent in 1996.

Incomes have not kept pace with housing prices. Between 1996 and 2006 the average income for first-time buyers has nearly doubled from £17,308 ($33,924) to £34,216 ($67,063) while average house prices have soared from £64,692 ($126,796) to £211,453 ($414,448). During the same period, the ratio of house prices to incomes have risen from 3.7 to above 6. Yet despite increasing signs of a massive and bloated bubble, house price inflation shows no signs of relenting. Last year, house prices increased by a staggering 9 percent.

Given that UK residents pay around 40 percent in personal taxes, many people are paying almost a half of their personal incomes on mortgage costs. In such circumstances, it is perhaps not surprising that people have resorted to personal unsecured debt to finance consumption expenditure. Nor is it surprising that an increasing number of debt soaked homeowners have resorted to personal bankruptcy.