Following the financial crisis, UK households experienced the longest period of falling real wages since records began.
They were poorly prepared for this, having run down savings and taken on increasing amounts of debt during the 2000s. It is estimated that the high levels of household indebtedness held back consumer spending, thus deepening the 2008-09 recession.
The economic uncertainty during the downturn prompted a reversal: saving dramatically increased and indebtedness fell. Now, having repaired their balance sheets, forecasters expect consumer spending to begin to rise again. Alongside this, debt is expected to increase, and savings to fall.
However, the analysis in Wealth in the Downturn suggests that we should not be so sanguine about the UK’s personal finances. Whilst it is true that on average there has been deleveraging, a very different picture emerges among some groups. In particular, those on the highest incomes are more secure today than those in the highest incomes before the downturn; but the opposite is true for those on the lowest incomes.
Our analysis is based on the UK Longitudinal Household Survey (also known as Understanding Society) and its predecessor, the British Household Panel Study (BHPS). These surveys provide data on thousands of households from across the UK. Unlike most surveys, Understanding Society and BHPS track the same individuals over time. This means that they can be used to go beyond simple analysis of snapshots in time, to examine the specific changes that individuals experience over a number of years.
In 2005 and 2012-13, the surveys also asked respondents for detailed information about their financial assets and debt (excluding mortgages). This provides a unique dataset to analyse whose fortunes have improved, and whose have deteriorated. We divide individuals into five equally-sized income groups, ranging from the bottom incomes to the top incomes. We do this for both 2005 and 2012-13. We also look at individuals split by other characteristics, including by age group and type of housing.
The winners include:
- The top 20%: The top income group are far more financially secure today than those in the top incomes going into the downturn. Median financial wealth in this group increased by 64% between 2005 and 2012-13. They are now less likely to be in debt compared to the middle-income group – a reversal of the pre-crisis trend. The proportion of individuals with non-mortgage debt in this group fell from 43% in 2005 to 31% in 2012-13. The top 40% have also seen an improvement, although the increase in financial security is not as substantial.
- Homeowners: Homeowners have been able to add more to their savings than other individuals, as they have benefited from lower housing costs. While those who were renting in 2005 saw no overall changes in financial wealth over the course of the subsequent seven years, those who started off as outright homeowners added an additional £750; and those with mortgages added £300. Those that paid off their mortgage between 2005 and 2012 saw a gain of £2,500. This is above and beyond the any gains made from increases in property values.
The losers include:
- The bottom 20%: The lowest income group are less financially secure today than those on the lowest incomes going into the downturn. By 2012-13, median financial wealth among the lowest income group was 57% lower than in 2005. Over the same period, the proportion of those on the lowest incomes with non-mortgage debt increased; and the value of that debt rose faster than incomes – by 67%. The use of overdrafts has risen, most likely as a consequence of general pressure on finances.
- 26-35 year olds: The intergenerational gap in incomes and wealth has widened. Wages for younger workers fell substantially during the downturn – at a greater rate than the average. 26-35 year-olds today are less likely to own a home. In 2005, 74% of 26-35 year olds owned a home; by 2012-13, this had dropped to 54%. Whilst the average deposit for first-time buyers has risen, the amount 26-35 year olds have in savings has fallen by 36%. On average, they have less than one week’s worth of income in savings. And whilst the proportion of 26-35 year olds in debt has slightly fallen, the amount debt-holders in this age group owe has increased by 45%. As with the low income group, the use of overdrafts has increased.
The link between wealth and income has become much more pronounced in the seven years since 2005. Most of the deleveraging that took place in the aftermath of the crisis happened among the top income group. Those on the lowest incomes have not built up their financial resilience. On average, they have less than six days’ worth of income in savings. Just under a quarter of them hold non-mortgage debt; and that debt is, on average, equivalent to around 28% of their income.
There is a need to support those on the lower incomes and younger age groups to save more. But this will be challenging, especially for those with little income to spare once necessities have been paid for. The process of repairing personal finances will most likely only begin once the expected growth in wages materialises.
Forecasts of GDP growth in the next parliament rely on growth in consumer spending remaining strong. Yet this analysis suggests that only those in older age groups and on higher incomes are in a position to start spending more. There is a limit on the UK economy’s ability to depend on consumer spending for growth. For a large number of people, the imperative is not to increase spending, but to rebuild the state of their personal finances.