One reason for this is simply that the prospects for gross lending are poor. The Bank of England's latest credit conditions survey found that lenders expect credit to borrowers with high loan to value ratios to "decline markedly" and expect loan rates to rise in response to higher wholesale costs. And it's not just the supply of mortgages that's tight. Demand will be weak too. Nida Ali, an economist at Ernst & Young's Item Club says: "low consumer confidence and high levels of household debt will continue to deter households from taking our mortgages."
At the same time, mortgage repayments might stay high simply as existing mortgages are paid off through normal repayments and maturity - partly as an echo of the large number of mortgages that were taken out in the boom of 25 years ago. In the last two months, repayments were £23.1bn, 7.8 per cent up on a year ago.
For this reason, we might well see a fall in households' debt-income ratio.
However, I'm not sure we'll see a huge fall as a result of people accelerating their repayments, for three reasons:
1. We don't know what the optimum debt-income ratio is, because it depends upon unobservable factors such as income expectations and the utility of housing relative to other forms of wealth or consumption. Households’ mortgage debt-income ratio has been trending upwards since credit controls were lifted in 1980; the ratio was 30 per cent then and 101 per cent in Q1 2012. You could have looked at the ratio at pretty much any time - with one exception we'll come to - in these 30-plus years and seen it at a record high. And yet it rose higher. The claim that debt is "too high" and that households will try and reduce it might prove to be correct – but the evidence for it is underwhelming.
2. Consumer spending is habit-forming. People (in aggregate – there are always exceptions) don't make massive shifts from spending to saving.
3. A big repayment of mortgage debt requires income which households don't have. For example, to reduce the ratio of mortgage debt to disposable income from its current 101 per cent to 92 per cent – its level in 2007Q4 - would require £90.7bn of repayments. That's equivalent to 16 months of all households' savings in all forms. Given that spending is habit-forming, repayments of anything like this amount will only happen if household incomes rise sharply. And nobody's expecting them to. Remember – the highest (gross) repayments of mortgage debt came in 2007, a boom(ish) year, rather than in hard times.
Since present records began in 1963, there have only been two periods when the ratio of mortgage debt to income ratio fell significantly. One was the mid-70s, when high inflation raised incomes. The other was in the early and mid-90s when a slump in the housing market caused gross new lending to be weak.
A repeat of the latter is very possible. A big fall in mortgage debt for any other reason is rather less likely. This is one reason not to fear a sharp drop in consumer spending.
