Whether or not we should be worried about household debt reaching its highest level for five years has made headlines recently. Given the majority of household debt is secured against dwellings, it’s an issue worth considering from a housing perspective.

ONS data shows total household debt has fallen from its 2008 peak at 168 per cent of gross disposable income to 142 per cent in Q3 2015. While this remains high relative to many other countries, the cost of servicing household debt is within affordable levels thanks to record low rates.

The future for the debt to income ratio and house prices will depend on the historic relationship between income growth and demand for housing as well as financial regulation, credit availability, affordability and possibly the level of new homes being built.

Perhaps of greater concern than the total amount of household debt is its distribution. Although the overall debt to income ratio has fallen, the actual value of outstanding debt has risen by seven per cent in nominal values since 2008. While this isn’t much, it has happened at the same time that the total number of mortgage holders has declined. As a result, the average outstanding mortgage value has risen by 15 per cent since 2008 and the average value of a new mortgage for house purchase has increased by 22 per cent over the same period.

Household debt is becoming more concentrated, particularly among first-time buyers. The median first-time buyer loan-to-income ratio has returned to its previous 2014 peak of 3.46x. Borrowers with higher mortgage-to-income ratios tend to spend more on servicing their debt, have their debt for longer, have higher levels of unsecured debt and may even be more exposed to higher interest rates.

Competition in the mortgage lending market looks set to grow, but at the same time as increased buy-to-let regulation and continuing constrained first-time buyer affordability. This could be a challenge for lenders looking for new customers and therefore could further increase the risk of mortgage debt becoming more concentrated amongst a smaller number of borrowers.

Given current low interest rates, there will inevitably be a number of households that can actually afford to substantially increase their repayments. However, in terms of concentrated debt, there is less capacity for large repayment increases amongst households already spending 20 per cent or more of their income. This suggests borrowers with larger mortgage-to-income ratios may struggle in the event of a significant mortgage rate rise, but that prospect appears to be getting pushed further into the future.

Further information

More details available from Savills Research