Looking at the household balance sheet of the UK economy, Professor Surico’s research compares three housing tenure groups, which are evenly represented: outright owners, mortgagors, and renters.
When you figure out how much the level of debt is in relation to the liquid wealth that they hold, as Professor Surico has, you quickly establish who will suffer most if debt increases.
His research has found that outright owners in the UK have significant liquid wealth but very little debt and so they are unleveraged. This means they can absorb an income shock without cutting back on essentials or even discretionary purchases. This means they can absorb further debt without cutting back on essentials or even discretionary purchases.
On the other hand, at the bottom of the wealth distribution, despite having less debt in total, the poor are more exposed. This is because their debt is higher than their level of wealth, therefore a poorer household in this situation is highly leveraged. This means they are likely to have to cut spending on essentials and certainly any discretionary spending, if they have any. This group also has no savings and, by definition, has more expensive unsecured loans and are living a hand-to-mouth existence.
The mortgagors in the middle are a very diverse group. The median in this group have comparable liquidity to the renters. These are households who have bought homes for the first time and who have stretched themselves to do so, by cashing in savings for a deposit. Even before COVID-19 struck, Professor Surico found, that a third of British people are spending every penny of income they receive.
The findings for renters looks worse when you consider employment. While mortgagors are typically in jobs they can do from home and are less likely to be furloughed, a higher share of people that have been furloughed are renters. In fact, people at the bottom of the income spectrum are seven times more likely, to be in a sector that has been shut down because of the crisis than people at the top of the income distribution. People on a low income tend to be younger, tend to be less skilled and tend to be renters.
In a collaboration with Sinem Hacioglu and Diego Kaenzig, Professor Surico and his colleagues looked at household spending across the outright owner, mortgager and renter groups. They found that, while spending has been cut across households, it was the wealthier households that cut the most in absolute terms. These cutbacks, across a discretionary basket, do little to harm their standard of living but does most to harm aggregate demand in the economy. The top 25% of the income distribution (which features far more mortgagors than renters) account for almost 50% of the decline in aggregate consumption associated with the COVID-19 crisis