Alarm over £1 trillion debt crisis

ALARM bells about a family debt crisis are sounded by the Bank of England today as fears grow that the economy is on the brink of a bust.

Households have embarked on a 'spend now, pay later' frenzy that is increasing personal debt at the equivalent of £1m every four minutes.

The Bank is concerned that family debt is about to burst through the £1trillion barrier. That figure is equivalent to 135% of the nation's entire annual income, after tax, which is the highest ratio on record.

Home loan debt has been increasing at the rate of 10% a year, while unsecured debt, through credit cards, personal loans and overdrafts, has been surging at 13%.

A report published by the Bank today points out that rising interest rates are expected to put the squeeze on thousands of families.

It highlights the fact that there has been a sharp rise in the number of personal bankruptcies this year, a trend that is likely to continue.

And it makes clear that the property boom has gone on longer and more fiercely than it predicted, making the possibility of a corresponding slump more likely.

In its latest Financial Stability Review, the Bank warns: 'Considerable challenges remain in an environment of firming interest rates and, for many borrowers, historically high levels of household debt.'

The record debt levels mean even relatively small increases in interest rates can deliver a financial body blow, particularly to those with big mortgages.

The Review warns that the impact of rises 'may be greater than in the past, given borrowers' generally higher debt-to-income ratios'.

Figures to be released by the Bank tomorrow show that the personal debt total will be close to, if not through, the £1trillion barrier.

The debt crisis has been fuelled by a number of banks relaxing their lending rules, effectively chucking money at people without making proper checks on whether they can afford to make repayments.

The Governor of the Bank, Mervyn King, has admitted surprise at the length and ferocity of the housing boom of the last three years. Given that the price increases have massively outpaced pay rises, he now believes the chances of falls are more likely.

The Review echoes these fears, warning of 'increasing household mortgage arrears and thus raising the risk of write-offs'.

By write-offs, the Bank bluntly means families being unable to keep up with mortgage repayments and being evicted.

A one-point rise in the base interest rate in the last seven months, taking it to 4.5%, has been designed to cool the housing market.

Figures published today and later this week are expected to show that the property market is already showing signs of turning. The property website Hometrack says today that the rate of house price growth has fallen for the third month in a row. And it says prices are dropping or stagnant in many areas.

John Wriglesworth, Hometrack's housing economist, said: 'There are the first signs that the market may be easing. New buyers have reduced and excess demand has fallen for the first time this year. With the effects of the recent interest rate rise still to feed through, it looks like the market will continue to slow this year.'

He ruled out a market crash, which has been predicted by some market watchers.

The Nationwide Building Society will produce its latest survey tomorrow. Its chief economist, Alex Bannister also believes the market is turning.