The financial position of British households: evidence from the 2019 NMG Consulting survey

Quarterly Bulletin 2019 Q4
Published on 20 December 2019

By Harry Rigg and Gosia Goralczyk (Structural Economics Division) and Georgina Green (Macro Financial Risks Division).

  • The financial situation of households is a key determinant of how they respond to changes in the economy and monetary policy. In our latest survey of British households, conducted in September, households’ income expectations were stable, but spending expectations fell slightly.
  • While households’ expectations around income and their own financial situation have remained relatively positive, their expectations about the wider economy have continued to be negative.
  • The proportion of households that spend a large share of their income servicing mortgage debt has remained low, although the proportion of households with high mortgage debt relative to their income has risen slightly.

Overview

The financial situation of households is a key determinant of how they respond to changes in the economy and monetary policy. Differences in households’ holdings of debt and assets affect how they respond to economic shocks and the likelihood that they will face financial distress.

The NMG survey is a biannual household survey commissioned by the Bank of England. The survey, which is carried out by consultancy firm NMG on our behalf, allows us to gather data on households’ finances and their expectations around their financial future and the wider economy.

The latest survey was conducted on 4–24 September, with 6,051 households sharing their views. At the time of the survey, households’ income expectations were stable and positive, but spending expectations fell slightly. While households’ expectations around income and their own financial situation have remained relatively positive, their expectations about the wider economy have continued to be negative.

The proportion of households that spend a large share of income on servicing debt has remained low in the latest survey, although the proportion of households with high mortgage debt relative to income has risen slightly. The amount of savings held by mortgage borrowers with large mortgages has risen in recent years, potentially enabling them to better smooth through future shocks.

The latest survey also asked how households would respond to sharp rises in unemployment and inflation.

Should the unemployment rate rise sharply, responses from the survey suggest that households would cut their consumption significantly due to the increased risk of losing their job. The responses also suggest households with a lot of debt would reduce their consumption by more than other households in this scenario.

Rises in inflation reduce the spending power of households if incomes remain unchanged. Responses from the NMG survey suggest the majority of households would seek to smooth through the impact of a rise in inflation, at least initially, with real consumption expected to fall by around half the fall in real income.

Introduction

Underlying UK GDP growth has slowed materially this year. That slowdown reflects weaker global growth, driven by trade protectionism, and the domestic impact of Brexit-related uncertainty, with investment by businesses particularly affected. In contrast, although its growth has slowed, consumer spending appears to have been relatively resilient. In 2019 Q2, real consumer spending grew by 0.3% compared with the previous quarter — similar to the average rate since 2017, but lower than the average from 2013 to 2015.

Disaggregated household data, such as that provided by the NMG survey, allow us to analyse how different groups have been affected by economic events. Differences in households’ holdings of assets and debt may affect how they respond to economic shocks and the likelihood that they will face financial distress.

The latest NMG survey was carried out online in September and the results reflect respondents’ views at this time. The survey has been run online since 2012, and has been carried out biannually since 2014, with the fieldwork taking place in April and September every year.

This article considers households’ expectations for their own personal financial situation and for the wider economy. It also provides an overview of households’ balance sheets — with a particular focus on vulnerable households. The final section reports how households would respond to rises in unemployment and inflation.

Household expectations

Households’ outlook for their income, financial situation and job prospects are likely to influence their spending decisions. The NMG survey contains questions about households’ spending intentions, their outlook for their personal situation and their outlook for the wider economy. Since 2016 H2, the survey has also sought views on the effects of Brexit.

Households’ income expectations were stable, but spending expectations fell slightly.

In the latest NMG survey, income expectations were stable, but the net balance[1] of households expecting to increase their spending over the next 12 months fell slightly to around zero (Chart 1). That balance had risen after the 2016 EU referendum before falling back in 2019 H1, largely mirroring the expected impact of Brexit on spending, and the pattern of inflation over that period. This would be consistent with the recent declines in the net balance for spending reflecting households’ nominal spending expectations.

In the 2019 H2 survey, households were asked why they expected to change their spending over the next 12 months due to Brexit. Most households expecting to change spending due to the referendum result reported that higher prices were the key reason (Chart 2), with fewer households citing changes in income/income expectations or changes in job security.

Chart 1 Aggregate spending and income expectations (a)(b)(c)(d)

Sources: NMG survey and Bank calculations.

(a) Question: ‘How has your household changed its spending compared with a year ago? Please include all your spending on goods and services, but exclude money put into savings or used to repay mortgages, overdrafts, credit cards and other loans’.
(b) Question: ‘How do you expect your household to change its spending over the next 12 months? Please exclude money put into savings and repayment of bank loans’.
(c) Question: ‘Over the next 12 months, how do you expect your total household income (before anything is deducted for tax, National Insurance, pension schemes etc.) to change?’.
(d) Question: ‘How do you expect the vote for Brexit to affect your household’s spending over the next 12 months? Please exclude money put into savings and repayment of bank loans’.

Chart 2 Main reasons for changing spending over the next 12 months (a)(b)

Sources: NMG survey and Bank calculations.

(a) Question: ‘What are the main reasons why you expect the vote for Brexit to cause your household to spend more over the next 12 months? You may select up to three responses but please ensure you select the main reason first’.
(b) Question: ‘What are the main reasons why you expect the vote for Brexit to cause your household to spend less over the next 12 months? You may select up to three responses but please ensure you select the main reason first’.

While households’ expectations around income and their own financial situation have remained relatively positive, their expectations about the wider economy have continued to be negative.

Since prior to the EU referendum, there has been a growing divergence between households’ expectations for their own situation (income, financial situation and likelihood of losing their job) and their expectations for the wider economy (Chart 3). Households’ expectations for the economy fell further in the latest survey, while income expectations and job prospects remained stable. As in previous surveys, the divergence appears to be predominantly driven by those households that believe Brexit will have a negative impact on the economy over the next 12 months.

Chart 3 General economy, income, financial situation and job loss expectations (a)(b)(c)(d)

Sources: NMG survey and Bank calculations.

(a) Question: ‘How do you expect the general economic situation in this country to develop over the next 12 months?’.
(b) Question: ‘Over the next 12 months, how do you expect your total household income (before anything is deducted for tax, National Insurance, pension schemes etc.) to change?’.
(c) Question: ‘How do you expect the financial position of your household to change over the next 12 months?’.
(d) Question: ‘To the best of your knowledge, what would you say is the likelihood that you will lose your job during the next 12 months?’.

Households’ interest rate expectations have fallen slightly. The median household expects one 25 basis point rate rise in interest rates over the next five years.

Households’ expectations on Bank Rate, the interest rate set by the Bank of England, have fallen since 2019 H1, but for the first time since 2016, they were above measures of expectations implied by financial markets at the time of the survey (Chart 4), at every time horizon.

This was mostly due to financial market measures shifting down considerably over the period. The median household now expects approximately one 25 basis point Bank Rate rise within the next five years. In contrast, financial market measures implied a 25 basis point cut over the same horizon, at the time of the survey.

Chart 4 Households’ and financial markets’ Bank Rate expectations (a)(b)

Sources: Bloomberg Finance L.P., NMG survey and Bank calculations.

(a) Question: ‘The level of interest rates set by the Bank of England (Bank Rate) is currently 0.75%. At what level do you expect that interest rate to be in each of the following time periods (one year, two years, five years)?’.
(b) Financial markets’ expectations averaged over the period of the respective NMG survey dates.

Developments in household balance sheets

How much debt a household has relative to its income and wealth affects its vulnerability to adverse shocks. Two key indicators for analysing household vulnerability are debt-servicing ratios (DSRs) — the proportion of pre-tax income spent on loan repayments (both capital and interest) — and debt to income (DTI) multiples of households. During the financial crisis, households with higher levels of mortgage debt relative to income cut spending more sharply than other consumers. The NMG and other survey data also suggest that the proportion of households experiencing repayment difficulties can rise sharply if a household has a mortgage DSR above 35%–40%.[2]

In addition to the distribution of debt, households’ asset holdings can be a useful indicator of household vulnerability. Households with higher savings, especially where these can be accessed relatively easily (liquid assets), are more able to smooth through shocks. Household responses to both unemployment and inflation shocks are covered in the next section.

The proportion of households that spend a large share of income on servicing debt has remained low, while the proportion of households with high mortgage debt relative to income has risen slightly in the latest survey.

In the latest survey the proportion of households with a mortgage DSR at or above 40% has remained stable at around 1%, while the share at or above 30% increased marginally (Chart 5). In 2017 H2 the proportions above both 30% and 40% increased sharply but, as the number of households involved is small, the annual increase in mortgage DSRs at 40% or above is not statistically significant.[3] Since then, both shares have recovered to close to their historical lows.

Around 3.5% of households reported an outstanding mortgage debt of more than four times their current pre-tax income — the highest level reported since the 2013 H2 survey (Chart 6). The increase in the proportion of households with a high mortgage DTI has been driven by strong growth in mortgage amounts outstanding, which has only been partially offset by nominal income growth. Since 2018 H2, the average mortgage amount outstanding is reported to have grown by 15%, while the nominal income of a mortgage borrower is reported to have increased by 4%.[4] Despite this, debt serviceability has been relatively stable, largely due to lower mortgage rates.

Chart 5 Per cent of households with mortgage DSRs at or above 30% and 40% (a)(b)

Sources: University of Essex, Institute for Social and Economic Research, NatCen Social Research, Kantar Public. (2019). Understanding Society: Waves 1-9, 2009-2018 and Harmonised BHPS: Waves 1-18, 1991-2009. [data collection]. 12th Edition. UK Data Service SN: 6614; NMG survey and Bank calculations.

(a) Mortgage DSR calculated as total mortgage payments as a percentage of pre-tax income.
(b) Data in dashed lines from 2011 onwards are based on responses to the NMG survey (2011 to 2019). Data in solid lines are calculated using BHPS (1991 to 2008) and Understanding Society (2009 to 2017). NMG data are from the H2 surveys only. NMG data before 2015 have been adjusted for a change in the income definition.

Chart 6 Per cent of households with mortgage DTI at or above three, four and five (a)(b)

Sources: Department for Environment, Food and Rural Affairs, Office for National Statistics. (2018). Living Costs and Food Survey [1991-2017]. [data collection]. UK Data Service. SN: 8351; NMG survey and Bank calculations.

(a) Ratio of outstanding mortgage debt to pre-tax annual income.
(b) Data in solid lines up to 2017 are based on responses to the Living Costs and Food (LCF) Survey. LCF Survey data are on a financial-year basis up until 2017–18, shown in chart as 2017. Data in dashed lines from 2012 onwards are based on responses to the NMG survey. NMG data are from the H2 surveys only. NMG data before 2015 have been adjusted for a change in the income definition.

Mortgage borrowers with a lot of debt have increased their savings in recent years, potentially enabling them to better smooth through future shocks.

The total savings (deposits and investments) of highly indebted households rose in the latest survey, with a continuation of the pattern reported last year. Within that, deposits held by vulnerable highly indebted mortgage borrowers have been rising. Over 55% of mortgage holders with debt more than four times their current pre-tax annual income have deposits greater than their monthly income (Chart 7). Deposits can be accessed relatively easily by households, and households with higher liquid assets like deposits expected to cut back spending by less in response to negative shocks.

Consistent with this, and the relatively stable income and job loss expectations noted above, there has been a decrease in households’ own perceptions of vulnerability (Chart 8). The proportion of households that reported being very concerned about debt, indicated that their unsecured debt was a heavy burden, or reported difficulties with accommodation payments all fell back, having risen in 2017 and 2018.

Chart 7 Percentage of mortgage borrowers with bank deposits greater than one month’s income (a)(b)(c)

Sources: NMG survey and Bank calculations.

(a) Mortgage DSR and DTI group calculated as in Chart 5 and Chart 6.
(b) Bank deposits provided by question: ‘How much do you (and all other members of your household) currently have in total, saved up in savings accounts? Please include bank/building society accounts or bonds, cash ISAs, and NS&I account/bonds’.
(c) Income: total household pre-tax income.

Chart 8 Subjective metrics of financial distress (a)

Sources: University of Essex, Institute for Social and Economic Research. (2018). British Household Panel Survey: Waves 1-18, 1991-2009. [data collection]. 8th Edition. UK Data Service. SN: 5151; NMG survey and Bank calculations.

(a) Data from 2005 to 2010 are from the face-to-face NMG survey. Data from 2011 onwards are from the online NMG survey. NMG data are from the H2 surveys only. Data from 1991 to 2004 are from the BHPS. Data from the BHPS and face-to-face NMG surveys have been spliced to match the online NMG survey results.

Box A: Measuring unsecured debt

As noted in our 2017 article, the NMG survey has tended to significantly understate households’ unsecured credit holdings, compared to the aggregate data. To explore the possible reasons for this, new consumer debt questions were added to the latest survey.

Some respondents were asked to provide their total unsecured debt holdings (a ‘top down’ question) consistent with previous NMG surveys. A second group was asked to provide separate responses for different types of debt (a ‘bottom up’ question). A third group was asked both types of question.

Analysis of the responses, and controlling for other characteristics, suggests that some households may omit certain types of debt when only asked ‘top down’ questions. The average ‘bottom up’ response was 68% higher than the initial ‘top down’ response.

As well as being higher, the bottom-up responses have growth rates much more consistent with the aggregate data (Chart A). However, a large gap persists between the level of debt reported bottom-up in the NMG survey and that implied by aggregate data. This could be due to respondents being unaware of other household members’ unsecured debt holdings. Perhaps consistent with this, the reported amount of unsecured debt per person falls as the number of adults in a household increases. Indeed, if we assumed that only the responses from the respondent and one other adult (eg a spouse) were accurately reported, this would take the average level of unsecured debt to 86% of the aggregate data average.

Chart A Measures of consumer credit growth: NMG (a) and Bank official data (b)

Sources: NMG survey, ONS data, Bank official data and Bank calculations.

(a) Change between average unsecured debt per household reported in 2019 H1 and 2019 H2 surveys. Excludes student loans.
(b) Growth in aggregate consumer credit data, without student loans, between March and August 2019, divided by the number of households based on ONS data.

Households’ responses to shocks

A rise in unemployment

A rise in unemployment is likely to impact consumption in two key ways. First, there will be a direct effect for those who lose their jobs and do not find another one. For instance, some households may be forced to reduce consumption, due to a lack of savings or an inability or unwillingness to borrow, even if they believe the fall in income to be temporary.

Second, more indirectly, households still in employment may become concerned that they could lose their job and their income could fall. Given this, they may choose to increase their savings to enable them to not have to cut back spending so abruptly should this event occur.

The latest NMG survey introduced new questions to explore the potential size of these direct and indirect effects.

Half of respondents reported that they would cut monthly spending if they lost their job, and by 37% on average. However, as only a small share of households would be directly affected by a sharp rise in unemployment, the aggregate impact on consumption would be relatively small.

To seek to understand the direct effects of job losses, respondents were asked to select up to three responses should they be made unemployed for at least six months. Around 50% of respondents indicated they would reduce spending, the most common response, while nearly 40% said they would use savings to help maintain their spending (Chart 9).

Chart 9 Response to being made unemployed (a)

Sources: NMG survey and Bank calculations.

(a) Question: ‘We’d now like you to imagine a scenario where you were made unemployed and this decreased your income, and meant that for at least the next six months your monthly household income was £Y less than usual and you were unable to regain employment. How do you think you would respond to this decrease in income during those six months?’.

Households that stated that they would decrease their spending in response to being made unemployed were asked by how much they would cut back. On average, those households said they would reduce spending by 37%.

Households were also asked if they thought the period of unemployment would damage their long-term career prospects and lifetime earnings. For those who believed the fall in income would be temporary and so would like to borrow or dip into savings to smooth consumption, respondents’ marginal propensity to consume (MPC) — how much each household would adjust its spending by for a given change in real income — varied by balance sheet position. For instance, mortgagors with debt of more than four times their income had an average MPC of 28% compared to an average of 18% for less indebted households. And households with below-average liquid assets expected to reduce consumption by around 42% more than others.

Based on these responses, a sharp rise in the aggregate unemployment rate by around 3 percentage points to 7%, a rate not seen since the last recession, would have a relatively small direct effect on consumption. Using the NMG survey data, the level of consumption would fall 0.5% in this scenario.[5] The same rise in unemployment would also have a very small impact on the share of high DSR households. The percentage of households with a DSR above 40% would increase from 1% currently (Chart 5) to 1.2%.

One key factor underlying the relative stability of consumption and vulnerability metrics in response to the direct effect of an unemployment shock is that it is focused on a relatively small share of households. In addition, due to the presence of additional earners in many households, only around 14% of households would lose all their employment income if the main earner became unemployed.

In terms of the indirect impact of a sharp rise in unemployment, a third of households reported they would cut back on spending or increase savings due to the increased risk of losing their job. The implied aggregate impact on consumption would be much larger than the direct effect and highly indebted households expect to cut consumption by more in such a scenario.

To understand the indirect effect of a rise in unemployment, respondents were asked to consider what they would do if ‘the unemployment rate in this country increased sharply to over 7%, a rate not seen since the last recession’. A third of households responded that they would cut back spending due to an increased risk of job loss or fall in income (Chart 10), with these households cutting back by 17% on average.

Chart 10 Response to unemployment rate rising sharply (a)

Sources: NMG survey and Bank calculations.

(a) Question: ‘We’d now like you to imagine a scenario where the unemployment rate in this country increased sharply to over 7%, a rate not seen since the last recession. How do you think you would respond if this happened?’.

NMG data suggest the level of monthly consumption could fall by 5% in such a scenario. This is much larger than the direct effect, which in part reflects that the direct shock would only impact a small number of households. The expected fall in consumption, and consequent rise in saving, was smallest for those with the largest existing savings, and for those with lower incomes who are less likely to be able to save much to build a buffer. In addition, these precautionary saving responses appear to be larger for more indebted households (Chart 11). This is likely to be part of the explanation for the findings that highly indebted households in the United Kingdom made larger cuts in spending during the last recession.

Chart 11 Percentage fall in consumption by mortgage DTI group (a)

Sources: NMG survey and Bank calculations.

(a) Estimated fall in consumption due to precautionary savings by DTI group. DTI calculated as in Chart 6. Regression includes controls for age, income, housing tenure, job status and total savings minus unsecured debt.

A rise in inflation

A rise in inflation would reduce the spending power of households in the absence of a rise in incomes. In the short term, some households could choose to dip into their savings or increase their borrowing in order to carry on buying the same amount of goods or services. Others may choose to spend the same amount of money, but buy less with it — so that their ‘real’ spending, ie the volume of things that they buy, would fall. How households react to a rise in inflation would affect the economic outlook.

The majority of households expected to smooth through the impact of an inflation shock on spending, with real consumption expected to fall by around half the fall in real income in the short run.

In this survey, respondents were asked what they would do if ‘the cost of everything — food, clothes, travel costs, getting your hair cut, getting the car washed etc increased by 4% from tomorrow and was expected to increase another 4% the year after’.

Three quarters of households reported that they would smooth through such an increase in inflation, at least partially. Just over one in five households reported that they would buy the same items as they do now, even though it would be more expensive. A quarter of households thought they would not increase nominal spending at all (and in some cases would cut spending), so that their real spending would fall. The remainder reported that they would increase nominal spending on some items, but not others. Their nominal spending would increase, but real spending would fall.

Households were then asked by how much they would change their spending in response to an inflation shock. This allows us to calculate their MPC. For a given change in real income caused by the rise in prices, this says how much each household would adjust its spending.

On average, households would reduce their real consumption by around 50p for every £1 fall in real income. This is consistent with households’ reported marginal propensities to consume in response to other negative income shocks.

However, responses differed substantially across different household groups. For instance, households with more savings anticipated reducing their consumption by less (Chart 12). In contrast, on average those households more concerned about their levels of debt or losing their job appeared less willing to smooth through the shock.

Chart 12 Average real spending MPC by total savings (a)(b)

Sources: NMG survey and Bank calculations.

(a) Question: ‘Based on your earlier answers, in this scenario it would cost you £x [which is calculated automatically from software as a 4% increase in monthly spending] more per month to buy the same things you currently do, although on some things you might choose to buy less or lower quality instead, to bring the cost down. If this increase happened from tomorrow, and was expected to increase again in a year’s time, roughly how much would you increase your monthly spending by from tomorrow? Please assume your income would not be any higher unless you take action to increase it’.
(b) Shows estimated average real MPC in response to a 4% inflation shock.

Conclusion

Notwithstanding the uncertainty around Brexit at the time of the survey, households’ expectations for their own financial situation held up in the latest survey, though spending expectations and expectations for the wider economy remained more subdued.

Data from the latest survey suggest there has been a slight rise in the proportion of households that spend a large share of their income on servicing their mortgage debt. Despite this, the cost of debt serviceability has been relatively stable, largely due to low mortgage rates.

Evidence from the survey suggests households would cut their consumption in response to an increased risk of losing their job should the unemployment rate rise sharply. The NMG data suggest this precautionary savings effect would have a much larger impact on aggregate consumption than the direct effect. This reflects the fact that the direct effect would be focused on a relatively small number of households. The survey also suggests highly indebted households would cut consumption by more than other households in such a scenario.

  1. The net balance is calculated as the percentage of households that expect to increase spending minus the percentage of households that expect to decrease spending. A positive net balance implies more households expect to increase spending than reduce it.

  2. See ‘The FPC’s approach to addressing risks from the UK mortgage market’, Bank of England Financial Stability Report, June 2017.

  3. The null hypothesis tested was: the percentage of households with a mortgage DSR at 40% or above in 2017 H2 is less than in 2016 H2. A significance level threshold of 5% was used to reject (or not reject) the null hypothesis.

  4. This is slightly higher than the comparable measure of annual household income growth in the National Accounts of 3.5% in 2019 Q2.

  5. This is based on an assumption that each household’s main earner faces the same probability of job loss and is calculated as the probability weighted sum of household spending responses as a percentage of total reported spending in the latest NMG survey.

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