The True Cost To Homeowners Of Rising Inflation & Interest Rates
The cost-of-living crisis and, in particular, the impact of 40-year highs in food inflation – now 14.5%, is starting to bite into the household budgets across the country, no matter whether you're on the lower income end of the scale or in a better financial position, everyone's starting to feel the pinch, and it stings!
I recently attended a conference and was fortunate to listen to a talk given by Richard Lim, the Chief Executive of the company Retail Economics. He gave an insightful speech about the economy and the future of both retailers and households with today's cost of living crisis, and he knew his stuff. I've caught up with him to discuss the current challenges, and I'm referencing some of this below; it's well worth the read.
Over the last few months, the narrative around the challenges facing UK families has shifted from a crisis affecting the most disadvantaged to one which engulfs the middle classes, which until now were in a financial position where they were able to weather the storm better than those with a lower income, the cost of living is digging deeper and affecting a more significant number of previously, more cost of living increase, immune households.
Let's look at housing as a significant cause of household's financial woes
Indeed, the rapid rise in interest rates (now a 14-year high of 3.0%) is a particular concern for those looking at remortgaging over the next 12 months. Let’s put some numbers around this.
• 30% of homes in the UK have a mortgage. The remainder either own outright, rent or are in social housing.
• 20% of mortgaged properties are on a variable rate and have already seen a significant impact.
• 80% of mortgaged properties are on a fixed rate. Of those, around 2 million households will have to remortgage before the end of 2023.
• 80% of those remortgaging before the end of next year will have enjoyed rates of 2.5% or lower.
• Average fixed rate 5-year mortgage is around 6%
• Average outstanding mortgage balance is around £130k, equating to an additional £250 per month.
Of course, many of us have much larger mortgages. A £400k mortgage equates to around £880 extra per month – enough to worry today's financially secure.
The increase in inflation, which today, 16th November 2022, rose higher than expected, with a leap in the rate of inflation, to a 41-year high of 11.1% last month, led by the latest rise in energy bills, and this will put pressure on the Bank Of England to increase the interest even further when the next interest announcement is made next month.
It's been widely expected that a further 0.5% interest rate rise will be announced by the Bank Of England in December, however this higher than expected inflation rate may well mean that the interest rate may increase to 0.75%, meaning the UK interest rate would be 3.75%, which would be great for savers, but another kick in the private parts for anyone with a interest rate tracked debt, such as mortgages.
Even for the renters, it’s just a matter of time. Currently, rents are up 4.2% year on year, but as tenancy contracts are renewed and buy-to-let mortgages refinanced, there will be much more to come.
But there is also a much wider impact at play.
Consumers are waking up to the fact that a decade of ultra-low rates has now come to an end. So, while many are cutting back out of necessity, there’s a growing proportion of financially secure consumers who are choosing the tighten their belts out of choice. Conversations about rising mortgage payments are being replayed all over the country, even if mortgage rates are fixed until 2025 or beyond.
There’s going to be a period of readjustment. Fear of the unknown will heighten consumers’ anxieties about making big-ticket purchases until clarity over their financial security is established. Meanwhile, a softening in house prices will also lead to a negative wealth effect, discouraging borrowing while at a time when lenders will also start raise the requirements bar.
Retail brands will face an increasingly polarised market over the next year. For most, investing in low prices and providing a compelling value proposition will be key. No surprises there. But the winners will be those that have the strongest balance sheets (and management teams), most efficient operating models and the largest leverage with suppliers to limit input cost inflation. Not forgetting that those with freehold properties, low levels of debt and flexible supply chains hold a competitive advantage - among many other moving parts.
Sadly it may be that we lose some well known retailers in the New Year, after all Christmas is the peak time for retailers, for most it's when they make their profit, with the rest of the year just covering costs and projects, so a hard up customer base can only mean decreased sales, decreased profit and it may be the end for some, with some well know companies such as Made.com already in receivership, so unfortunately we end 2022 with a somewhat cold and foggy outlook for 2023 - Sales is vanity. Profit is sanity. Cash flow is reality!
Retailers and those working in retail can get support and advice from the Retail Trust and this can be a real help during these economic hard times..