Household debt and delinquencies on the rise – what it could mean for the financial system

Rising household debt levels have become an area of concern for markets as credit card and auto loans delinquencies (missed or late payments) trend towards global financial crisis (GFC) levels.

| 5 min read

Major global economies have been resilient, the labour markets remain robust, and consumers keep spending. But more consumers are taking on debt and delinquencies are on the rise. At what point does global household debt become a concern and what could it mean for future consumption?

In this article, we’ll examine the latest figures released on household debt and delinquencies, and outline their potential impact on economic stability.

Household debt and delinquencies are rising

In the US, household debt grew during the first three months of 2024. So did delinquencies. Notably, the number of credit card balances in serious delinquency – which is 90 days or more - climbed to its highest level since 2012. The rise in delinquencies hasn’t been concentrated to one particular age group, with rises across the board.

The charts below shows delinquencies are increasing, and trending towards GFC levels for auto loans and credit card debt, although mortgage delinquencies have remained stable.

So, why are delinquencies on the rise? Delinquencies fell to historic lows during the pandemic as interest rate plummeted to record lows and consumer spending fell due to lockdowns. This allowed consumers to build up some savings and pay off existing debts from economic stimulus and government-support schemes, such as stimulus checks.

However, the recent rise in debt levels is a result of the cost-of-living crisis where rising global inflation and higher interest rates have put financial pressure on householders. As a result, consumers have run down their ‘covid savings’ and are now looking to using credit cards and loans as they battle with higher-than-usual bills and mortgage payments.

What about mortgage delinquency rates?

When assessing delinquencies and the systemic risk they pose to the financial system, missed mortgage payments are by far the most crucial measure.

Mortgage delinquency rates have remained stable. In the US, missed payments on mortgages have stayed below 1% since the start of the Covid-19 pandemic. This is very low by historical standards, especially when compared to the height of the GFC where mortgage delinquency rates reached 8.9%.

In the UK, the latest figures from UK finance shows a modest increase with 3% of homeowner mortgages in arrears in Q1 2024 when compared to the previous quarter. This was driven by the continued impact of cost-of-living pressures and higher interest rates.

The overall proportion of UK mortgages in arrears remains low, at 1.11% of homeowner mortgages and 0.69% of Buy-to-Let mortgages. UK finance classifies a mortgage in arrears when the arrears reach 2.5% of the outstanding balance.

It’s important to note, the mortgage system in the UK is very different to the US and other EU countries. Around 70% of US homeowners fix a rate for the entire term of the mortgage – typically 30 years – whereas UK borrowers usually remortgage every two to five years. This means US homeowners aren’t having to deal with the same financial shocks of higher mortgage payments as UK homeowners who are having to remortgage.

Overall, mortgage delinquencies remain low in the grand scheme of things, which alleviates concerns with regards to systemic risk. This is positive news given interest rates across major economies have peaked, with inflation returning towards its long-term average, and the first major central bank (the ECB) has begun its interest-rate cutting cycle.

Labour market remaining firm, for now

Rising household debt and delinquencies are causing some market jitters. However, debt alone does not present itself as a major problem unless it’s coupled with a declining labour market. The theory being, while consumers continue to be employed, the vast majority will be able to pay off their debt gradually over time and continue to meet essential loan repayments such as mortgages.

The good news is the labour market performance remains in a good shape. The JOLTs quit rate, which measures the amount of people who voluntarily leave their job, is falling – reaching its lowest rate since August 2020. This is accompanied by very low levels of initial claims for unemployment benefits, falling employment costs, and less vacancies, with no major increase in unemployment.

Finally, payrolls and wages are trending towards levels consistent with the 2% inflation target.

The bottom line

As covid savings have been whittled down, consumers are looking at credit to supplement their income and maintain spending habits. This shouldn't be a concern as long as they keep their jobs. Rising household debts and delinquencies will act as a headwind for consumption, despite stronger wage growth.

While debt is increasing, its from a much lower when compared to the GFC. Household balance sheets are in a much healthier place than before the GFC too, and therefore does not present any systemic risk higher than usual.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

Household debt and delinquencies on the rise – what it could mean for the financial system

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