The credit crunch may have changed our attitudes to debt forever
Since the credit crunch, instead of borrowing and spending, people are paying down their debts as fast as they can. And it looks like being a permanent trend.
The 'Squeezed Middle'. The 'Coping Classes'. Whatever you want to call them, they aren't exactly paving the road to conventional recovery for the nation. Instead of borrowing and spending, they are paying down their debts as fast as they can.
Last year, homeowners paid down their mortgages by a total of £24.4bn. And in the last quarter of the year alone, they injected £7bn into their homes via higher deposits and higher loan repayments, says The Times. That represents a "massive reversal" from their behaviour during the boom and bubble years: from 1997 to 2007, UK families withdrew £320bn worth of equity from their homes and took on huge levels of personal debt along they way (personal debt now adds up to £1.45trn in the UK).
However it also represents a new long-term trend if a report just out from Friends Life has any truth to it. According to them, "the recent recession has radically altered attitudes towards debt for a generation." The Coping Classes have suddenly recognised that with over half of them so financially insecure that they would be unable to provide for their families for longer than six months if they lost their main source of income, they need to cut spending fast and focus on "reducing debt to stave off the threat of a potential financial survival gap." So they are "embracing a new set of behaviours."
The result? 84% say they are committed to not taking on any more debt. And nearly 75% say they are putting plans in place to get rid of all their debt in the next ten years. At the same time, they are budgeting carefully and taking an increasingly high level of responsibility for their own retirement finances.
Given the historically high propensity of the UK population to borrow and spend, I would usually be minded to take this kind of thing with a pinch of salt. But not this time. I don't imagine that too many MoneyWeek readers are glued to Superscrimpers, the C4 show I appear in on Wednesdays (although you might give it a go... it is entertaining), but those that are will know that my job is to wander the streets of the UK's cities bothering people until they tell me about the state of their personal finances.
I've spoken to hundreds of people and every single one of them has told me either that they have no debt and no plans to take any out, or that they are doing everything in their power to get out of debt. Look at the Superscrimpers website and you will see that all the questions to the show on financial matters address the same sort of thing: people want to know how to save, how to budget and how to get out of debt. And given the way rising inflation and taxation is decimating their real wages, they now want to know urgently.
This isn't necessarily a bad thing for the long term it is all part of the cycle and part of the rebalancing of the UK economy. But, today's nice jump in the UK services index notwithstanding, it is probably making the coalition feel a little nervous.