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Low income families ramped up borrowing pre-crisis

Low income families ramped up borrowing pre-crisis

Category: Loans

Updated: 15/05/2012
First Published: 15/05/2012

MONEYFACTS ARCHIVE
This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.
The scale of household borrowing in the run up to the financial crisis has been laid bare by a new report.

The UK was seemingly in good financial health from 1997-2007, as household spending, UK GDP and property prices all consistently increased.

However, low to middle income households were hugely reliant on borrowing to fund much of their spending in the ten years leading up to the beginning of the economic downturn.

Research by the Resolution Foundation has uncovered that the poorest 10% in the UK were outspending their income by 40% by 2007.

Given that only a minority of the poorest households in the UK are homeowners, it is highly unlikely that their spending will have been offset by a rise in their housing wealth.

Spending grew faster than incomes across all households, but for the poorest groups this was much more pronounced.

For the bottom 10%, incomes grew by 17% while spending grew by more than twice as much (43%).

Even middle income households found themselves falling behind, with incomes growing by 33% and spending growing by 46%, resulting in a negative savings ratio for a full ten years before the crash.

"We all know by now that the debt position of households grew starkly worse in the run up to the financial crisis,"
Gavin Kelly, chief executive of the Resolution Foundation, said.

"But what this report exposes is the dramatic difference for lower income households who were way outspending their incomes by 2007.

"Looking to the future, we need growth that is sustained by gains spread across the whole income distribution - not ever more debt for those on the lowest incomes."

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