after which it reversed sharply. the surge in credit in the second half of the 1920s was less pronounced and shorter ; it reversed after about five years. before 1953, the series shown in the graph relates only to the credit provided by banks ; after that it includes credit provided by all intermediaries. graph 3 one of the clues as to why the recent episode of credit expansion has lasted longer is that it has been driven to an important extent by household borrowing rather than business borrowing. we have estimates of household and business credit, of varying quality, going back to the 1920s. before that, it is possible to get some guide to the split of borrowing between businesses and households by looking at which institutions were doing the lending. for example, credit extended by trading banks traditionally has mainly gone to businesses, while that extended by savings banks has mainly gone to households. the next couple of graphs decompose the series for total credit shown in graph 3 into its business and household components. in the case of business credit, graph 4 shows that the ratio of business credit to gdp exhibits big cyclical and secular swings, but these have taken place around a flat trend over the 150 years shown on the graph. periods when the financial sector has been relatively unregulated, such as the 1880s and the past couple of decades, have resulted in the ratio of business credit to gdp being elevated. the subdued credit growth in the 1950s and 1960s, a period when the financial sector was heavily regulated, also is noticeable. graph 4 i don ’ t think these outcomes are surprising. in the very long run, however, there are various economic relationships at work that tend to tie down the relationship between business credit and gdp. specifically, business profits cannot consistently rise faster or slower than gdp, and in the long run the p / e ratio also cycles around a flat trend. the combination of these two facts means that growth in the value of business equity must also be tied to gdp growth in the long run. in turn, this works to tie down the relationship between business debt and gdp, as the gearing of companies ( i. e. the ratio of debt to equity ) cannot consistently rise or fall. let me now turn to household credit, as shown in graph 5. here the picture is very different. up until the 1970s, households ’ access to credit was very limited. those of us over 50 years of age can remember when, in order to qualify for a housing loan, people had first to establish a long

to buy shares. these are all signs of rising affluence, driven by a very prolonged economic expansion. over 80 per cent of households in the top half of the income distribution have some type of debt, compared with only 30 per cent of those in the lowest decile ( graph 7 ). essentially, higher - income households are the ones that have the capacity and the financial security to take on debt. it seems that debt is one of those products, like education and health, which has a high income elasticity of demand – i. e. as income rises, demand for it rises more than proportionately. it would be a mistake, therefore, to conclude that a rising ratio of debt to income is necessarily a sign of financial stress among households. graph 7 it is the high - income groups that have had the biggest increase in debt over recent years ( graph 8 ). about three quarters of the increase in owner - occupier debt over the decade to 2005 / 06, for example, was attributable to households in the top half of the income distribution. if comparable figures on debt associated with investment properties and margin loans were available, they would almost certainly further skew this distribution of debt. graph 8 despite the rise in the debt of this group of households, their debt servicing burdens remain relatively low. for those households who are in the top half of the income distribution and who have an owner - occupied housing loan, housing loan repayments currently average a little less than 20 per cent of gross income. this has risen only marginally over the past decade, and it remains significantly lower than the figure of around 30 per cent for households in the bottom half of the income distribution. this suggests that the former group still has substantial capacity to service debt. at the aggregate level across all households with owner - occupier housing debt, the median ratio of housing loan repayments to gross income, at about 21 per cent, is only marginally higher than a decade ago ( graph 9 ). graph 9 another interesting feature emerges when the composition of debt is broken down by age group. this shows that a large contribution to the increase in household indebtedness has come from households aged 45 - 65. this group no doubt overlaps considerably with the high - income household group. over the 10 years to 2006, the proportion of households aged 45 - 64 that are carrying owner - occupier debt increased very noticeably, from 25 per cent to 38 per