Lies, damn lies and statistics …

Many commentators have expressed concerns that UK household debt had risen to record levels of around 120% of annual post-tax income by mid-2003, up from around 90% in the mid-nineties. Some members of the Bank of England’s monetary policy committee have suggested this might cause them to vote for higher interest rates in the near future.

Other economists take a more relaxed view, arguing that higher borrowing is a rational response to rising house prices and low interest rates.

They point out that the recent accumulation of household debt has been matched by purchases of property and financial assets, so overall household sector balance sheets remain reasonably healthy.

True enough, but there are still areas of concern. First, a lot of unsecured debt on credit cards and the like has been taken out by lower income households with few, if any, financial assets. Second, if interest rates rise over the next few years, as now seems quite likely, debt burdens could begin to pinch. And, finally, if house prices start to fall, then negative equity could again become a serious problem in some parts of the country. So borrowers would be wise to be cautious.

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