Home owners and personal debt.

by on January 24th, 2011

I’ve been looking at a sample of nearly 24,000 debt-worriers who are also home-owners and who approached us for advice between 2005 and 2010.

Home-owners have traditionally often used debt-consolidation as their preferred route for making credit card and unsecured debt more affordable: “The value of the house has gone up – let’s slap the credit cards on the mortgage” (it costs less per month, it might cost more in interest charges in the long run).

Well, in these straitened times, does that still apply? The answer is that things, in some cases may be looking a little rosier – but, for once, it seems the most well-off amongst us may have more to worry about than those at the bottom of the pay scale.

First, amongst our enquirers, average unsecured debt exceeded equity in 2008 and 2009. In 2010, equity rose and overtook debt once more – quite sharply in fact.

 level of debt vs equity

Over the period, the average unsecured debt owed by all enquirers has come down too – so there might be room for consolidation in theory. In practice, there isn’t – because the banks aren’t lending to anyone other than their best customers – and people with substantial debts don’t often fall into that category.

We looked at average property values too – arranging the data to show the average property price for each year amongst home owners whose take-home pay fell into 6 bands between <£10,000 and more than £50,000.

property values comparison

Not surprisingly, the less you earn, the less your house is worth. Possibly surprisingly (I really must go and look at some property websites) the properties losing the greatest proportion of their value were those owned by the wealthiest respondents. Between 2005 and 2010, properties owned by people earning more than £50K had declined in value by 13%. Properties owned by enquirers in the lowest two income bands (<£10K and £10-£20K) had actually risen (well only be a per cent or three - but they'd not declined).

The biggest issue, when it comes to using your house as a money-well for debt repayment, is negative equity: If your house is worth less than you paid for it, then debt-consolidation is never going to happen.

I think this issue is particularly significant because, for many years now, the better-off have assumed than, barring the odd hiccup, their house is always going to enable them to turn short term, expensive, unsecured debt into long term, affordable, mortgage debt.

Well, I suspect there is a small crisis waiting to happen here - Higher earners  who have made this assumption may well have increased their unsecured debt, just to make ends meet, over the last year or two, confident their property is going to bale them out.

Well, one in four of them won't be able to.

level of negative equity compared to earnings

I was really surprised by the chart above. Every income group except the highest, returned exactly the same result for each year we looked at. In 2010, therefore, 10% of every group except those that earned £50K-plus had a house that was worth less than they’d bought in for. In contrast, 23% of those in the highest income band had lost the ability to use their house to fund their other debt.

  • http://www.integrity-debt-solutions.co.uk Darren

    We have seen a sharp rise in people requesteing help with debt who have negative equity since july 2010. Not only that we are now getting more and more with equity everyday.

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  • http://zero-credit.co.uk Emma Bryn-Jones

    I’m assuming Darren is Mr Perks at Integrity Debt? It’s great to see you guys sharing data so openly – we need to understand the UK Debt market far better if we are going to get a grip on it, so thanks for putting this in the public domain.

    Andrew, what is your source for the UK property valuations – perhaps a link?

  • http://www.cleardebt.co.uk/ Andrew Smith

    Hi Emma,

    All the data is ours – the house prices referred to are those referred to by the people asking us for help, when they give us the initial details of their financial situation.

    Hope that helps.

  • Andy

    If the house price valuations that you are quoting are the ones supplied by the people requesting help with their debt then the odds are pretty good that that their estimates are significantly too high. One of the key causes (along with the lack of available credit) of the current stagnattion in the volume of house price sales is the reluctance of homeowners to quote a realistic selling price.

    This could mean that the situation is a lot worse that shown by your figures and the higher earners who have repeatedly MEWed expecting ever-rising house prices could be a lot further into negative equity. You state that this might be a ‘small crisis’ but IMHO it is starting to look more like a Perfect Storm especially when Interest Rates start their inevitable rise.

  • http://www.cleardebt.co.uk/ Andrew Smith

    Hi Andy, I think you could have a point – it certainly sounds right. However, I checked it out with our IVA drafters and they have a different point of view.

    They have to obtain a property valuation in the course of putting forward an IVA, so they get an opportunity to compare the enquirer’s initial gut feel valuation with a later one, based on Land Registry returns and thus prices actually achieved, rather than Agent’s proposed selling prices.

    Our guys’ view is that the enquirer pretty much gets it right most of the time and that, when they get it wrong the difference, pretty much all of the time and pretty much irrespective of property value, is “about ten grand”.

    I don’t think this negates your core point though. As interest rates rise and property prices fail to harden, more and more of those families who always saw re-mortgaging as their get-out-of-jail-free card will find it’s no longer there.

  • Andy

    Ok, that’s clearer. When you stated “the house prices referred to are those referred to by the people asking us for help” I read it as being the equivalent of self-certification. If the valuations have been independently verified then hopefully it should be a lot closer to true market value but the only true test is the market itself and at what level they can find a buyer with access to the necessary funds.

  • http://www.cleardebt.co.uk/ Andrew Smith

    “but the only true test is the market itself and at what level they can find a buyer with access to the necessary funds”.

    Darn right! At the moment, and probably for some time to come, access to necessary funds is going to be an issue for many. It’s almost impossible for people with any noticeable debt history to get an advance at anything but the lowest loan-to-value ratios.