The proportion of households with debt-service ratios between 30% and 40% is now much smaller than it was in 2008. 6  BIS central bankers’ speeches  of their capital, funding and liquidity positions. But risky UK mortgage assets, along with UK commercial property, certainly damaged a number of UK institutions. One risk from an increase in household balance sheets due to house purchases being financed by ever increasing amounts of debt is that homeowners can’t repay the mortgage in times of stress. We saw this in the UK in the 1990s. But the main damage in the last crisis from high levels of UK households’ secured debt however did not come so much through bank losses or through the huge falls in house prices seen in other countries. Cushioned by the cuts in interest rates to effectively zero, QE, and stronger-than-expected employment levels12, UK households were largely able to maintain servicing their debt even though their real income was declining. Indeed they paid debt down to reduce the size of their balance sheets. But to do so, they cut back their consumption markedly, thus deepening and prolonging the recession. Real household consumption fell by 6% between end 2007 and 2009. This is an important if less well known risk from large household balance sheets. Even if they pay their mortgages households cut back consumption when house prices fall and uncertainty about future income increases.
So one very important lesson in this is that traditional indicators of the business cycle cannot be relied upon to flash warning lights about vulnerabilities building up in the financial system. Where did the money go? If the total amount of UK private credit in the economy rose sharply in the 10 years before the crisis without much impact on private sector demand or the economy as a whole, where did the money go? Some went to business – around a third, much of it to commercial real estate. But the bulk, around two-thirds of the credit, was to households (Chart 3). Bank lending to households made a particularly large contribution to credit growth in the first half of the 2000s. And while unsecured lending grew strongly over the period, it only comprised about 10–15% of lending to households. The much larger part was, of course, secured lending for housing. And it is fair to call it a boom. Secured household debt relative to annual household income was stable at around 70% for much of the 1990s, before rising rapidly to over 110% by 2007. The stock of household debt secured on housing went in real terms from around £ billion to £ billion. The main driver of course was the increase in house prices relative to earnings over the period – from about 2.5 times climbing to 5 times. Households have of course a house on their balance sheet – to set against the debt.