Families hit by falling earnings and rising mortgages

Published 13th Aug 2007

Alliance Trust Research Centre’s latest quarterly Financial Reality Index indicates that families are not reining in their spending despite facing increasing financial pressures...

Alliance Trust’s measure of the real financial state of UK homes showed a slight uplift in the second quarter, thanks to strong growth in the economy. However, the Alliance Trust underlines that overall the prospects for consumers are worrying as their spending continues to spiral out of synch with homes’ actual balance sheets.

Having fallen to a ten year low in the fourth quarter of 2006, the Financial Reality Index inched higher in the second quarter to 82.0, up 8.3 points on the first three months of 2007, according to latest findings from the Alliance Trust Research Centre. People’s real financial state of affairs is still languishing well short of the critical 100 level, which reflects the long term average for a combination of budget, wealth and economic factors.

You’ve never had it so bad…
Shona Dobbie, Head of Alliance Trust Research Centre, commented, “Homes are still being squeezed by lower real earnings growth at the same time as they face higher mortgage payments and council taxes. The biggest pressure is coming from rising mortgage payments though homes are getting a little help as basic goods inflation slows. The real financial condition for most homes remains very close to the low of late last year, when our index found homes facing the worst financial predicament since our ten-year study began.”

Dobbie continued: “Ironically, on the 50th anniversary of Macmillan’s assessment that people have never had it so good, we can say that despite rising house prices and a stable economy, in some ways they have never had it so bad.”

Real earnings lowest in ten years
ATRC’s Financial Reality Index is based on a ten year quarterly analysis of 11 underlying national and domestic financial indicators, which together have proved a reliable ongoing predictor of consumer financial confidence and willingness to spend. However, the study reveals that while this range of financial conditions has worsened significantly over the past 12 months, consumers seem to be burying their heads in the sand with spending growth accelerating back to 2.9%.

The main Financial Reality Index rose to 82.0 in the second quarter, from 73.7 in the first quarter. The three underlying components that make up the index, Economic Background, Household Budget and Net Wealth all showed some improvement. Economic Background rose to 133.6 from 118.5 to show the strongest reading in three years. Household Budget was up marginally to 39.6 from 35.3, but is still the third lowest reading since our study began. Net Wealth climbed to 101.1 from 92.8, moving above 100.

Dobbie commented, “We expect consumer spending to slow quite dramatically over the next year as consumers finally realise the reality of their financial situation, which is clearly shown by our index. There is still no sign, however, that this reality has sunk in with consumer spending rising at around 3% in the last quarter. The main reason why we think spending will falter is the pressure from mortgage payments and other outgoings that are not being matched by similar increases in real wages.”

Dobbie added: “There is some good news in our wealth analysis since house prices are still rising and equities are strong. These two factors are outweighing a worrying rise in debt and the wealth measure has moved into positive territory for the first time since the first quarter of last year.”

Source: ' Move Channel Ltd '

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