How does household financial resilience compare to the early 1990s recession?

Published on 20 January 2023

Household financial resilience has improved significantly since the late 1980s, as fewer households have taken on mortgages with high loan to value ratios. This will protect households, and lenders, in the event of sharp house price falls.

The increased cost of living and rising mortgage rates are making it harder for households to afford their mortgage repayments.

Current macroeconomic conditions – high inflation, rising unemployment and tightening monetary policy – are similar to those in the run-up to the early 1990s recession. In that case, mortgagor defaults, and associated bank losses, rose sharply.

Inflation, at 11.1% in October 2022, was above its early 1990s peak. Markets expect Bank Rate to have risen by around 4.5 percentage points before it peaks, broadly comparable to the increase in the run-up to the early 1990s, though today’s level remains significantly lower. The current unemployment rate is also low, but the roughly 3 percentage points increase projected in the November 2022 Monetary Policy Report is similar to the early 1990s.

While there are parallels between the macroeconomic stresses, household financial resilience has improved significantly since the 1990s.

A key metric is the loan to value (LTV) ratio, which measures the relationship between the mortgage amount and the market value of the mortgaged house. Mortgages with high LTVs carry greater risk of households and lenders incurring a loss, as even a small fall in house prices can cause the outstanding loan to be worth more than the property.

Financial liberalisation in the 1970s and 1980s led to more lender competition and a weakening in underwriting standards, such that the proportion of new lending at high LTVs rose. Around 40% of new lending was at or above 90% LTV in 1991, compared with less than 20% in 2022 (Chart A).

The share of new lending at or above 90% and 95% LTVs increased substantially in the late 1970s and remained high until the mid-1990s, peaking at over 50% and 30%, respectively. Over 2022, the share of new lending at or greater than 90% and 95% LTVs was below 20% and 5% respectively.

Sources: 5% Sample Survey of Building Society Mortgage Completions (BSM), Product Sales Database (PSD), Survey of Mortgage Lenders (SML) and Bank calculations.
(a) The dashed lines show data based on BSM (up to and including 1991) and SML (1992–2004). The solid lines show PSD (from 2005 onwards).
(b) BSM and SML surveys contain samples of lenders’ mortgage lending, so may not be fully reflective of the total mortgage market.

Consequently, around 30% of outstanding mortgages had LTVs at or above 90% in 1993. The combination of stretched household finances in the recession and a 9% fall in nominal house prices, led to a sharp rise in mortgage defaults and large losses for lenders.

Losses over the whole of the 1990s recession were estimated at 1.8% of total mortgages for UK banks and building societies. This is around three times larger than losses incurred during the global financial crisis. And they were 2.8% when also taking into account losses incurred by insurers.

The share of mortgages with LTVs at or above 90% make up less than 1% of outstanding loans today. So, households and lenders are in a stronger position than in the early 1990s, despite the similarly challenging macroeconomic environment.

This post was prepared with the help of Gerry Gunner, Elspeth Hughes, Marek Rojicek and Gabija Zemaityte.

This analysis was presented to the Financial Policy Committee in 2022 Q4.

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