Borrowed time

The driving force behind the increase in debt has been the housing market. We have borrowed to keep up with rising house prices and then used the rising value of our homes to borrow even more. Mortgage borrowing totalled £7.81billion in June, the highest monthly total since records began in 1993.

Yet home owners are not the people suffering most from debt. They may well be storing up problems for the future by failing to recognise that inflation will not reduce the real value of their debt as it has in the past. But for the moment they are doing very nicely. Levels of borrowing may be much higher than they were but repayments for new borrowers are still affordable – at 14 per cent of average gross earnings compared to an average of 22 per cent since 1983 – unless interest rates rise.

The real victims of the credit splurge so far are people who do not own a home to borrow against. A survey published by Citizens Advice in May shows that consumer credit rather than housing debts is the major problem facing clients. Between 1997/98 and 2011/02 enquiries about consumer credit debts such as bank loans and credit cards rose by 47 per cent, whereas housing debt enquiries fell by 10 per cent.

The Citizens Advice clients were poor – their average net monthly household income was £803 or less than half the UK average – and 40 per cent of them were renting their home from a social landlord.

‘This is about ease of access to consumer credit,’ says Sue Edwards, of Citizens Advice. ‘Tenants of social landlords are living long-term on low incomes, having to deal with life events, who have nothing left to give. If your cooker breaks down what do you do?’

‘Social tenants are also likely to be paying much higher interest rates than home owners. Many are financially excluded, unable to borrow from mainstream banks and building societies. They borrow instead from catalogue firms, from doorstep lenders and from unlicensed local lenders and loan sharks.

‘Credit is easy to access through catalogues and home-collecting credit providers,’ says Edwards. ‘They deal with you in the privacy of your own home. The interest is very high, but what you see is what you get.’

Loans are often short–term, and annual equivalent interest rates can be anything from 60 to 600 per cent. Often the only way to service the debt is to take out another loan and then another. In the end something has to give. Rising debt is one of the main factors behind the soaring levels of social landlord evictions highlighted by ROOF over the last five years.

According to Bob Paterson, project director of Community Finance Solutions (CFS) at the University of Salford, 80 per cent of financially excluded people are tenants of social landlords.

CFS surveyed 500 people in three London boroughs – 80 per cent of them social tenants – as part of a feasibility study for London & Quadrant Housing Trust about setting up a community development finance institution. The results showed that:

• 62 per cent had weekly household incomes under £200 (compared with a 30 per cent average for the UK)
• 54 per cent used some form of credit
• 20 per cent had catalogue debt
• 56 per cent had no savings
• 24 per cent did not have a current account
• 42 per cent did not have a debit or cheque guarantee card.

‘There is a corollary between mortgage borrowing being easily available at increasingly low rates to those with property and people with no property only being able to borrow at higher rates,’ says Paterson. ‘Everybody borrows but the poorer you are the more difficult it is to repay it.’

Paterson believes social landlords should be doing far more to help tenants in debt – for the sake of their businesses as well as their tenants – through what he calls asset liberation. ‘Housing associations are very wealthy organisations – at least in voluntary sector terms – but they are housing some of the poorest people in society. What we’re doing is a liberation of some of the assets of the organisation to benefit the people they house.

‘It makes business sense to do this because you’re getting a better individual and a better tenant, more rent, less voids and lower repair bills. In the southern half of the country it enables them to put a good case for getting new development money and in the north of England it may make the difference between letting and not letting a property.’

Community reinvestment trusts have already been set up in Portsmouth (where Paterson was managing director of a local housing association), Salford, Derby and East Lancashire and more are on their way. Financial support has come from housing associations, local authorities, the Housing Corporation and financial institutions.

‘A lot of our customers can’t get access to credit from banks or building societies,’ says Kath Knowles, regional manager of Places for People, which is supporting East Lancs Moneyline. ‘The only alternative is loan sharks and interest rates of 800 per cent are not unusual.’

Meanwhile London & Quadrant has set up the community finance institution Change and agreed to plough in £1 million if it can demonstrate a business case by next year.

Pilot projects offering a range of services from small business loans to financial education are already underway in four boroughs in partnership with other landlords.

Andy Chaplin was hired from Barclays as project manager. He argues that the high correlation between financial exclusion and social housing communities ‘makes this prima facie an issue for us.

‘In a lot of cases social housing residents don’t have the opportunity to make a choice about where they go to borrow money. Residents are taking on debt not to pay for luxury items but for every day essentials. They don’t necessarily think of the way the money is being lent – the only issues are: can you access the money? And will you lend it to me?

‘If you can’t get a high street bank to lend to you because you have the wrong postcode or the wrong family circumstances, who do you go to? The answer is one of the doorstep lenders, or even worse one of the unregulated lenders.’

Chaplin says fear of getting into debt is much less of a factor for younger tenants than their older neighbours. ‘General expectations have been set by the house price boom and borrowing on the back of it. Tenants strive to keep up with some of that and it’s very difficult to do without going into debt.’

He estimates the doorstep lending market is worth £700 million in London. Credit unions have 15,000 members in the capital but there are more than 800,000 social housing tenants.

‘If you’re going to be effective in helping residents break out of this you have to do two things: put in place a circuit breaker and allow people to get off the treadmill; and equip them with the skills and self–belief to organise things for themselves.’

Paterson believes that Change represents a step change in community finance but it could just be the precursor of something even more ambitious. CFS is in discussions with ten other London associations including Family, Metropolitan, East Thames and Hyde about matching London & Quadrant’s £1 million investment.

‘If we did get that, overnight it would be bigger than the whole credit union movement in London,’ he says. ‘Housing association assets in London are worth billions. A little bit of that value reinvests in the community.’

But Change and initiatives like it cannot come soon enough for hard–pressed tenants. Advisers fear their problems could become even harder to deal with over the next few years as a result of government reforms of housing benefit. Pilot schemes for the flat–rate housing allowance start in the private rented sector in October and could follow in the social sector by 2015 or 2016.

Under the plan, tenants will no longer have the option to have housing benefit paid direct to their landlord, raising concerns that running up rent arrears will become much easier. Plans to remove benefit from tenants who are ‘anti–social’ will only add to the problem.

The Department of Trade and Industry (DTI) is committed to taking action against some of the more unscrupulous lenders with a review of the Consumer Credit Act and a taskforce on debt. But it is hard to escape the impression that social tenant debt is getting lost as an issue somewhere between the DTI and Department of Work and Pensions.

‘Social landlords have been left out the picture,’ says Sue Edwards. ‘The indebtedness taskforce looked at issues relating to owner occupiers but not tenants. We need a cross-cutting overall review of debt.’

Like it or not, debt seems set to become an even bigger issue for social landlords, leaving them a choice between watching their rent arrears and evictions rise, or using some of their assets to benefit their residents.

‘Is a housing association a business that produces a product and if the consumer doesn’t comply with the rules then they’re out?’ asks Bob Paterson. ‘Or is a social landlord responsible to the community as a whole? If you see it as a commodity and a brand, you are less likely to be a community investor.

‘But if you see it as being about the wider community, then you are more likely to put your money where your mouth is.’