In 1979 I needed a £500 loan from my bank (with whom I had been a customer for 18 years) to buy a distinctly dodgy second hand car. At the time I was a Lecturer at Aston University. To get the loan approved I had to meet the manager of the bank branch. I put on my suit, prepared my ‘case’ and yes I got the loan – but not before the manager had got to know his customer a little bit better.
Today, as a Lecturer at The Open University, I could, if I wanted, turn on my computer click the mouse half a dozen times and get a loan for £18,500 (equivalent to over £5,000 in 1979 money) without talking to anyone. And I thought we were in the middle of a ‘credit crunch’! Oh well, it saves on dry cleaning costs!
Of course the intervening 29 years may have changed the assessment of my credit worthiness ..so perhaps we are not talking about a like-for-like comparison. But during the intervening years there has been a ‘sea change’ in the access to and availability of credit. This change has had a hugely influential impact on the economy, on the housing market and on people’s lifestyles.
So how and why did the credit environment change, and are the recent developments in the financial services sector now threatening to take us back to the years of more considered and tighter credit?
The increasing availability of credit can be traced back to the so-called ‘liberalisation of financial services’ in the 1980s. This much used term relates to the changes in the financial services industry, prompted in part by government legislation that encouraged financial services providers like banks and building societies both to expand and diversify their activities, and to become more competitive in their operations.
Changes occurred quickly. Prior to this ‘liberalisation’ you were normally expected to save with a building society before applying to it for a mortgage. Even if you were granted one you had to queue - mercifully not literally - for the funds. Relationships with banks and building societies were long term and people did not tend to flit from one provider to another as they do now.
Post ‘liberalisation’ the financial services providers competed on price more competitively and marketed their products more keenly (witness the ‘junk mail’ we still receive). The benefits for the consumers during the sustained boom from the early 1980s until the past year (interrupted briefly, and with some pain, by the slump in the housing market from 1991 to 1994) have been obvious.
Readily available credit fuelled a boom in house prices, making all home owners feel wealthier. New entrants into the financial markets – particularly the credit card market – provided a further dimension and scale to the growth in personal indebtedness sustaining in its wake a consumer boom throughout the country. In past fifteen years the level of personal debt in the UK has ballooned from £400 billion to nearly £1,500 billion - a staggering £1.5 trillion of outstanding mortgages, loans and credit card debt!
For the providers of financial services business was good. With credit booming profits rose whilst the credit exposure to the borrowing was (and is) contained by the growing value of property against which the vast majority of the debt (currently 84%) is secured.
A love affair was in place: the public loved the lifestyles that cheap and readily available credit could provide. For the lenders the expansion of credit meant growing balance sheets, growing profits and growing pay for those running the businesses.
So how and where did it all go wrong? The immediate source of the current problems was the collapse in the sub-prime mortgage market in the US. This did not directly impact on households in the UK - rather it meant that the funds UK financial institutions relied on to finance their lending dried up as banks became more reluctant to lend to each other.
The drying up of funds pushed up the cost of credit and triggered a fall in house prices – since availability of credit is a key house price driver. The fall in house prices has made households feel less wealthy and so discourages consumer spending. The fall in the price of property, against which most personal debt is secured, has made lenders more cautious about their lending policies.
For those borrowing - or seeking to borrow - the current environment is the worst for decades. Lenders have tightened their lending policies and increased the cost of borrowing - for example by ‘risk-adjusted' pricing on higher risk loans.
The impact of the debacle in the financial services industry - particularly the demise of HBOS and Bradford & Bingley - has also diminished the volume of credit available to households. The capacity to meet credit repayments has also been squeezed by the impact on household budgets of rising fuel and utilities prices.
For those lending - and there is not much sympathy for the institutions whose lending policies are deemed to have fuelled the boom-bust in the credit markets - there is the prospect of arrears, bad debts and losses. The weakest will lose their independent existence as HBOS, Alliance & Leicester, Bradford & Bingley and Northern Rock already have.
Having spent nearly thirty years in love with credit many households and lending institutions are now left ruing their financial relationship.
Listen to this blog post on our Money & Management podcast.