Consumer debt defaults will rise by 17 percent during the next five years, leaving 4.7 million households in arrears by 2020, according to a forecast from Arrow Global.
The debt purchaser has made its first ever econometric forecast of consumer debt defaults, for the next five years, by correlating the default triggers of unemployment and interest rates to government predictions of consumer debt levels.
Arrow Global undertook the research as part of a major report to be published in full later this year called Debt Britain: The Big Picture.
This first piece of work for the report unearthed some important trends and predictions such as:
• A rise in consumer borrowing coupled with higher interest rates will fuel a 17 percent increase in households in default by the second half of 2020.
• The rise is expected to leave an extra 700,000 households in default, increasing from an estimated four million currently to 4.7 million by 2020.
• The increase follows a period where lower interest rates have handed borrowers an estimated windfall of £34bn a year (£1,300 per household per year).
• If the Bank of England base rate is just 0.5 percent higher than expected over the whole forecast period, defaults would rise by 24 percent by 2020, with the number of households in default reaching five million.
Arrow Global explained that the consumer debt burden has reduced during the past seven years, with government data showing a fall in the debt to income ratio from 145 percent in 2008, to 120 percent by the second half of 2015.
However a cyclical rise in consumer debt is now underway as the economic recovery matures, the company said, a factor underpinned by growing consumer confidence and strengthening financial institutions.
The government’s Office for Budget Responsibility (OBR) forecasts a £640bn increase in consumer debt by 2020, a rise of 37 percent and an extra £24,000 for every household.
Unsecured credit is expected to be the fastest-growing component, increasing by 49 percent (£8,000 per household) by the end of 2020. At that point, net consumer lending will be running at a record level of £142bn and the consumer debt to income ratio will exceed 160 percent.
Defaults rise as consumers borrow more
The Arrow Global forecast reflects the normal cycle in defaults. This tends to follow the economic cycle with a lag, with defaults rising once consumers have had the confidence to take on more debt and lenders have had the confidence to increase lending and broaden the range of consumers they will lend to.
Arrow Global has also examined the impact of interest rates rising faster than the OBR prediction. Its analysis reveals that if the bank rate is 0.5 percent higher over the whole forecast period, defaults would rise by 24 percent between the first half of 2015 and 2020, with the number of households in default reaching 5.0 million by 2020.
The debt buyer added that alternatively, if bank rate rises 0.5 percent lower than predicted, the number of households in default will rise by only 10 percent to 4.4 million.
Most problem debts are stable
Arrow’s analysis of its management information reveals that the typical amount owed by its customers who have previously defaulted is relatively modest and is very stable at around £2,500. This suggests that while the volume of consumers in default may be set to increase over the next five years, this does not mean that the value of a typical default will rise in the same way.
The analysis also reveals the impact of rising consumer debt and higher interest rates on mortgage possessions and personal insolvencies.
These two measures reflect the impact that debt defaulters could face if they fail to make good their debts.
Arrow Global’s analysis predicts mortgage possessions to increase by nine percent from a low of 10,400 in 2016 to 11,300 in 2020 (a rise of 900) and personal insolvencies to rise by three percent between the low of 78,100 in 2016 and an annualised total of 80,200 in the second half of 2020.
By Marcel LeGouais