Did you realise that Britons are now more likely to take out big, long-term loans on cars than on housing? I have to confess, until I looked into the state of Britain’s private debt markets for my Times column today, I didn’t.
But, as you can see from the chart below, the proportion of new car purchases made with finance overtook the proportion of home transactions made with mortgages a couple of years ago.
It signifies a few things: first, the slump in activity in the mortgage market, thanks in no small part to the travails of the banking sector. Second, the sharp rise of alternative forms of finance – of which car loans are only one part. Think purchase agreements, think payday lenders such as Wonga. Believe it or not, you can now get a buy-to-let loan on a car.
The increase in availability of finance is at least partly down to the billions of pounds pumped into the system by the Bank of England (and its US counterpart, the Federal Reserve) through quantitative easing.
In the column I also mention the fact that although the Bank of England has officially left monetary policy on hold these past few years, in reality monetary conditions throughout the UK are still loosening. You what? Just compare the official bank rate, frozen at 0.5%, with the actual interest rates you find in the market, on loans and savings.
As you can see from this chart from Michael Saunders, mortgage rates have been falling steadily in recent years, and just hit fresh record lows. In other words, far from having its foot on the brake, the Bank still has its foot on the accelerator pedal.
My full column is subscription only, but here’s the first few pars:
Welcome to Britain. Where the economy is growing faster than any of the other advanced industrialised nations but living standards are cratering. Where the world of finance is so perverse that you are now more likely to take out a loan on your car than your house. Where household debt is falling for the rich and rising for the poor, while incomes head in completely the other direction.
The UK economy has always been a scramble of contradictions but have the paradoxes ever been as great as they are today? It’s a question that senior Bank of England policymakers are asking themselves in the run-up to tomorrow’s inflation report. And with good reason — nowhere are these contradictions more evident than in their field of monetary policy.
Happily, quantitative easing, the money-creation exercise carried out on both sides of the Atlantic, did not trigger the Weimar-style hyperinflation that some alarmists predicted. But the Bank is nonetheless facing a sequence of aftershocks as its money seeps through the system.
Consider the car industry, which recently reported that vehicle sales this year are likely to hit the highest level for a decade. Tempting as it might be to put this phenomenon down to renewed consumer confidence and dazzling economic growth, there is a simpler explanation: everyone is borrowing like crazy. For the first time, there are proportionally fewer cash buyers in the car market than in the housing market. Some 76 per cent of today’s car-buyers are taking out long-term loans, according to the Finance & Leasing Association. That compares with around 65 per cent who are taking out mortgages to buy a home. You can now even get a buy-to-let loan on a car.
Britain’s shadow finance market is booming, whether that means purchase agreements, asset finance or payday loans. QE is one reason: for many lenders, money is cheaper than ever. For the other half of the explanation one need only look at real wages, which have been falling for lower-income earners since well before the crisis. Once again, many are having to resort to debt to keep afloat.