Consumer credit conditions in the United Kingdom

It is widely perceived that credit supply conditions faced by UK consumers, particularly in the mortgage market, have been liberalised since the late 1970s, with implications for the housing market and consumer spending. This paper examines quarterly microdata from the Survey of Mortgage Lenders to learn about changes in credit conditions from loan to value ratios (LVRs) and loan to income ratios (LIRs) of first-time buyers (classified by region and age). It combines data on the proportions of high LVR and high LIR loans with aggregate information on UK consumer credit and mortgage debt to give ten quarterly series for 1975-2001. These are modelled in a ten-equation system. A comprehensive set of economic and demographic influences on the demand and supply of credit, applying relevant sign restrictions, are controlled for. A single time-varying index of credit conditions captures the common variation in the ten credit indicators which cannot be explained by the economic and demographic controls. The broad coverage of credit market indicators and thorough investigation of economic forces driving the credit market should make the resulting credit conditions index more robust than previous estimates. The index increases in the 1980s, peaking towards the end of the decade. It retraces part of this rise in the early 1990s, before increasing again to levels, for one of the two measures, exceeding the previous peak. The index is useful in modelling consumption and the housing market, and in interpreting current monetary conditions. An important by-product of the paper is the model for consumer credit and mortgage debt developed here.