Peter Sharkey: Don’t fall into the zombie household trap

Curse of the Zombie is one of those ridiculously trashy movies best watched with family or friends when under the influence of alcohol. This particular re-run of a re-run of a very tired genre, released in 1989, opens with a team of archaeologists heading to Thailand in search of rare artefacts when they happen upon a remote village. Once there, the village chief's outrageously beautiful daughter takes a fancy to one of them. You can guess the rest.

Fast-forward 23 years and we have living among us a rather more menacing, modern-day 'zombie' according to the National Institute of Economic and Social Research (NIESR).

Following their analysis of Financial Service Authority figures, NIESR has said that our overall level of wealth will not return to pre-recession levels until 2019 at the earliest as almost one million heavily-indebted 'zombie' households act as a drag on recovery.

The think tank also forecast an average annual fall in house prices of 1.5pc for the next five years.

The two predictions are linked. NIESR believes that the effects of an already slowing housing market are likely to be exacerbated by debt-laden 'zombie' households, many of which will be unable to meet their mortgage payments once economic recovery finally arrives and interest rates start rising.

It's a gloomy scenario which might persuade savers and investors to nip down to Blockbuster to see what other zombie-themed movies they have for hire in order to cheer themselves up.

A spokesman for NIESR correctly predicted that once economic recovery gets under way, at some point very soon thereafter interest rates will have to rise, a situation which will make matters much worse for those mired in unmanageable debt.

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If some people are finding the going tough when base rates are at 0.5pc, imagine how difficult things will become should they head towards their so-called 'neutral' level of 5pc and unemployment continues to rise. The spectre of home repossessions may not be far away.

This perilous situation could be made considerably worse should new regulatory powers vested in the Bank of England be ruthlessly applied.

At present, banks are understandably reluctant to realise potential residential property losses unless a mortgage is in the deepest arrears imaginable.

The last thing any bank needs at the moment is more bad publicity, but nor do they want to repossess assets that they then have to sell at a loss. Far better to help and encourage struggling mortgage holders through the difficult times than to acquire an unwanted property portfolio.

Yet when the recessionary clouds begin to disappear (which, granted, could be some time), the Bank of England's Financial Policy Committee will be tasked with monitoring risks associated with debt, including that held by households. This could mean that banks will be forced to clean their balance sheets by getting rid of mortgage debts that show little sign of being repaid or are consistently in arrears.

NIESR suggests that economic recovery is already the slowest in a century and that it will take 76 months from the beginning of the crisis for GDP to recover to pre-recession levels.

It's a forecast as depressingly familiar as one generally anticipates for a bank holiday weekend. In this instance, however, it should serve to encourage those in a position to do so to pay down their debts while interest rates remain low to avoid becoming a 'zombie' household.