New York Times
March 22, 2008
Debt-Gorged British Start to Worry That the Party Is Ending
By JULIA WERDIGIER
LONDON - At one point, Alexis Hall had more than 50 pairs of designer shoes
and handbags. It never occurred to the 39-year-old media relations executive
from Glasgow that her £31,500 in debt ($63,000) would be a problem.
"It was so easy to get the loans and the credit that you almost think the
goods are a gift from the shop," she said. "You don't fully realize that
it's real money you are spending until you actually sit down and consolidate
your bills and then it's a shock."
As the United States economy weakens, many Americans are being overwhelmed
by personal debt, but Britons are even more profligate. For most of the last
decade, consumers here went on a debt-financed spending spree that made them
the most indebted rich nation in the world, racking up a record £1.4
trillion in debt ($2.8 trillion) more than the country's gross domestic
By comparison, personal debt in the United States is $13.8 trillion,
including mortgage debt, slightly less than the country's $14 trillion
And while the Federal Reserve in Washington has cut interest rates, in an
effort to loosen lenders' grip on credit, the Bank of England's interest
rate increases last year are trickling through to mortgages at the very time
home values are dropping and banks are becoming more reluctant to lend.
Until now, debt has mostly been a good thing for Britain. In the hands of
free-spending consumers, it fueled economic growth. The government borrowed
heavily in recent years to invest in infrastructure, health and education,
creating a virtuous cycle: government spending led to job creation, which
led to greater consumer confidence and more spending, which, in turn,
Economists say Britain's relationship to debt is complex, but at its core is
a phenomenon more akin to recent American history than European trends. As
in the United States, a decade-long housing boom and strong economic growth
bolstered consumer confidence, creating a perception of wealth almost
unknown in countries like Germany and Italy.
"Culturally, maybe also because of the defeat in the war, Germans remain
reluctant to borrow and banks are often state-owned, pushing less for
profits from lending," said Alistair Milne, a professor at Cass Business
School in London.
Since many younger Britons have never lived through a period of slow growth,
few now see the need to hold back on borrowing, not to mention saving.
"The general mantra is spend now, think later," said Jason Butler, an
adviser at Bloomsbury Financial Planning. "It's easier to get a loan or a
credit card these days than to get a savings product."
The average British adult has 2.8 credit or debit cards, more than any other
country in Europe. A growing number are borrowing to pay for vacations,
furniture, even plastic surgery. As a result, Britons are spending more than
they earn, racking up a household debt-to-income ratio of 1.62 compared with
1.42 in the United States and 1.09 in Germany.
To her parent's generation, Ms. Hall said, owing money beyond a mortgage was
"shameful," an admission of living beyond one's means. Debt was also more
difficult to get.
That changed in the late 1990s when American lenders, including Citigroup
and CapitalOne, pushed into the British market with a panoply of new lending
products. Fierce competition among banks meant potential borrowers were
suddenly bombarded with advertising and offers for low- or no-interest loans
and credit cards.
While Britain's financial regulators watched the explosion of retail lending
from the sidelines, their counterparts in Germany and France were more
restrictive. As a result, the British market became the largest and most
sophisticated in Europe.
The growth was also fueled by soaring demand for debt on the back of rising
real estate prices and relatively low interest rates in the late 1990s and
early 2000s. Those who did not own a house rushed to join the homeowners
watching their property triple in value.
The trend on the Continent was the opposite. Home prices in most European
countries barely moved, mainly because markets were more regulated, there
was more housing stock and renting was more popular.
Liz Bingham, head of restructuring at Ernst & Young in London, blames the
obsession with homeownership on Britain's "island mentality": land is seen
as a finite good and a valuable asset.
"The housing boom automatically made people feel richer than they actually
were and people went on to use the equity locked up in their property almost
as a bank account they can dip into every time they want to buy a new car,"
Ms. Bingham said.
As the perception of wealth grew, the social stigma around debt disappeared.
Borrowing became such an accepted part of life that today one in five
teenagers does not consider being in debt to be a bad thing, a survey by
Nationwide Building Society showed.
Debt levels increased further as it became easier to get loans, and
retailers, like computer chain PC World, offered both goods and the loans to
buy them. Consumers happily accepted, thinking that as long as they were
deemed creditworthy, they were not in danger of defaulting.
Andy Davie is a case in point. Even after he had racked up £70,000 in
personal debt trying to keep his fruit and vegetable business afloat, credit
card issuers kept increasing his credit limits.
"You tend to use credit to pay for credit and as far as the banks are
concerned you are fine," said Mr. Davie, 41.
He was finally forced to declare bankruptcy. Though still painful, the
process made the prospect of defaulting slightly less daunting.
"Rather than showing up at court you just fill in an online form and speak
to someone on the phone," said Mark Sands, director of personal insolvency
at KPMG in London.
The ease of the bankruptcy process, the availability of debt, the property
boom and strong economic growth, lulled consumers into a "false sense of
security that is now coming to haunt us," said James Falla, a debt adviser
at London-based Thomas Charles.
"It's all good as long as the economy is doing well, but if that changes
people will really get caught short," he added.
And things are changing. Growth has already started to slow this year, and
the government lowered its 2008 forecast to 1.75 percent to 2.25 percent,
after 3.1 percent growth last year.
Home prices are falling, despite a dearth of housing and an influx of
wealthy Middle Easteners and Russians, especially in London. Last year,
housing foreclosures reached the highest level since 1999 and are expected
to rise still further this year.
And more than one million homeowners have adjustable-rate mortgages that are
expected to reset in the next 12 months -- to significantly higher rates.
The prospect of rising costs has already prompted some consumers to change
their spending habits. The camera retailer Jessops and the fashion store
French Connection are among retailers feeling the squeeze and reporting
lower sales since the end of 2007.
But changing spending habits will not be enough to solve the problem of
rising debt levels, said Mr. Butler, the debt adviser. Consumers will also
have to learn to save.
According to a survey for the Office of National Statistics, less than half
the population saves regularly, and more than 39 percent said they would
rather enjoy a good standard of living today than save for retirement. Ms.
Hall said she was among that 39 percent. She recently took out new loans,
planning to repay her existing debt. But she ended up spending the money on
more luxury goods instead.
This year, she published a book about her experiences. She said she did not
expect the book's proceeds to repay her debts, but it may help the growing
number of people in similar positions cope with theirs.