flow of lending at certain debt - to - income limits in respect of new owner - occupied residential mortgages. this gives the fpc a tool to target overall household indebtedness should it consider that it posed a risk to financial stability. what does the last financial cycle tell us about sustainability? putting all of this together, it seems reasonable to conclude that since the 1980s there have indeed been long lasting forces that pushed down on both the risk - free interest rate and the spread that lenders charge. this lowered the rates charged to borrowers and raised the price of houses. it will also have raised the sustainable level of debt. but it is not at all clear that in future these forces will raise the level of sustainability further. there is much uncertainty and discussion now about further downward shifts in the real interest rate as a result of secular stagnation and lower potential economic growth. but though such effects, if they occur, may continue to push down the risk free interest rate, they will as i have said, also push down income and are therefore unlikely to improve sustainability. judgments about sustainability are difficult. the household debt to income ratio has come down materially since the crisis – back to its 2004 level of 135 %. the debt service ratio shows a similar picture. it is back to 2001 levels. and, crucially, within this, we ’ ve seen a fall in the proportion of heavily - indebted households and the share of households spending a high proportion of their income on debt repayments ( chart 7 ). 11 but the position is sensitive to upward shifts in interest rates without a similar increase in incomes, especially if some of the powerful forces that have pushed rates down since the 1980s begin to unwind. and it is very vulnerable to a resumption of the rise, in credit relative to gdp driven by housing that we have seen for most of the last 40 years and that we saw particularly in the upswing of the last financial cycle. how much do such risks matter? the growth of credit and household debt relative to gdp and income in the uk did not, as some commentators have pointed out, trigger the financial crisis in the uk. the proximate cause was the overseas exposures of uk banks to very risky assets and the extreme fragility debt service ratio is defined here as mortgage interest payments plus mortgage principal repayments as a proportion of total household income. the share of households with very high mortgage debt to income ratios ( above 5 ), for instance,

has fallen back significantly since 2012 and is now back to levels seen in the 1990s. the share of households with moderately high mortgage debt to income ratios ( between 3 and 5 ) has also fallen. the proportion of households with debt - service ratios between 30 % and 40 % is now much smaller than it was in 2008. bis central bankers ’ speeches of their capital, funding and liquidity positions. but risky uk mortgage assets, along with uk commercial property, certainly damaged a number of uk institutions. one risk from an increase in household balance sheets due to house purchases being financed by ever increasing amounts of debt is that homeowners can ’ t repay the mortgage in times of stress. we saw this in the uk in the 1990s. but the main damage in the last crisis from high levels of uk households ’ secured debt however did not come so much through bank losses or through the huge falls in house prices seen in other countries. cushioned by the cuts in interest rates to effectively zero, qe, and stronger - than - expected employment levels12, uk households were largely able to maintain servicing their debt even though their real income was declining. indeed they paid debt down to reduce the size of their balance sheets. but to do so, they cut back their consumption markedly, thus deepening and prolonging the recession. real household consumption fell by 6 % between end 2007 and 2009. this is an important if less well known risk from large household balance sheets. even if they pay their mortgages households cut back consumption when house prices fall and uncertainty about future income increases. this was especially true in the last recession for the more highly indebted households who cut spending substantially than did less indebted households. that is, the distribution of debt also matters. similar effects were seen in other countries. and there is considerable evidence that recessions that follow debt financed housing booms are worse. the imf estimate that for each additional 10 percentage point rise in household debt prior to the global financial crisis, the consumption loss ( as a percent of pre - crisis trend ) was larger by 2. 6 percentage points. other studies have come to similar conclusions. 13 conclusion since the 1980s the uk has seen a sharp and very material increase in the credit to gdp ratio and in the stock of household debt relative to income. this was particularly pronounced in the 10 year upswing of the last financial cycle when credit grew over twice as fast as gdp. this surge in credit did not finance an economic boom. indeed,