Lorna Bourke: Personal debt will trigger property collapse

It’s not the same this time round. 

How many times have we heard that? Mortgage pundits reassure us that with full employment homebuyers won’t get into difficulties and repossessions will be nowhere near the 78,000 a year seen in the property collapse of the early nineties.

But while the optimists no doubt take comfort from the fact that UK unemployment fell by 39,000 to 1.61 million in the three months to the end of February, nobody seems to notice the elephant in the room. 

Just as the regulators had no idea of the extent of banks’ off balance sheet financing – and failed to identify the trigger for the credit crunch which ensued – so everyone is concentrating on the wrong consumer figures. 

In the early nineties high unemployment created by the collapse of the debt market in 1987 and rising inflation meant homebuyers could not meet their mortgage obligations. Does that sound familiar? 

Today we don’t have rising unemployment – yet. But it will be credit card debt which will bring down the house of cards.

The proportion families are spending on servicing mortgages is now as high as in 1990 – and they didn’t have anything like such large credit card and unsecured debts then. Personal unsecured debt has more than doubled over the past 10 years. 

A report this week from financial analysts Mintel showed that mortgage costs have trebled during the past 10 years. It said mortgage repayments now account for 25% of consumer spending, or £1 out of every £4, compared with just 14% 10 years ago.

There is no doubt that families are experiencing a squeeze on budgets. Anecdotal evidence from mortgage brokers and lenders indicates that a high proportion of those who have flexible mortgages are already taking payment holidays in order to make ends meet.

And today (Wednesday) a report from debt management company TDX Group predicts that the number of people struggling with debt is set to double during 2008. TDX estimates that about one million people have ‘problem’ unsecured debts, totaling £25 billion or an average of £25,000 each. Total UK unsecured debt is £1.3 trillion – more than the total for all of the rest of the EU put together.

And TDX should know – it provides detailed debt-collection information to banks and mortgage lenders such as HSBC, HBOS and Alliance & Leicester.  Some 60% of this money is owed on credit cards, with the rest mainly personal loans.

Last year, an estimated 58% of people in financial difficulties refinanced their debt or remortgaged to make their repayments more manageable. ‘There will be fewer refinancing solutions such as re-mortgaging and homeowner loans available, because banks and building societies have tightened up their lending criteria,’ warns the TDX report.

It said that last year 400,000 people remortgaged or applied for new credit cards or personal loans to pay off old loans, while bankruptcies and IVAs are running at near record levels.

And consumers seem to be burying their heads in the sand where spending on credit cards is concerned. A survey from website CreditExpert.co.uk (today) reveals that millions of individuals continue to spend to impress friends – with no idea how they will repay these debts.