According to a new report just out by the Resolution Foundation (RF), UK households face a torrid time in the coming months in what is going to be the worst cost-of-living crisis in living memory.
It's the aftermath of a Covid pandemic that involved massive Government borrowing, compounded by an energy price hike brought about by first major European confrontation (the Russian invasion of Ukraine) since World War 2.
Inflation hit double digits for the first time since the 1970s, and following the abrupt shock to the financial system brought on by the Truss / Kwarteg mini-budget, mortgage rates went from less than 2 percent to plus 6 percent in a matter of days last November.
The respected research group's findings puts the UK halfway through a credit squeeze that will shave �2,100 off the average household income, and this will be much higher in the case of some businesses, including landlord businesses.
Rent payment issues
Fortunately, in this recession, jobs are holding up well. Nevertheless, such an unprecedentedly high reduction in household incomes will have implications for rent payments '� rent arrears will almost certainly increase over the period, until costs come down and peoples finance's stabilise.
It is likely, says the RF, that the income squeeze will reduce disposable incomes faster and deeper than in the global financial crisis of 2007/8.
Lalitha Try, researcher at the Resolution Foundation says:
'Britain is only at the mid-point of a two-year income squeeze. The crisis is already taking its toll on families, with over 6 million adults reporting they are going hungry as a result.'�
The foundation identified higher energy bills, mortgage costs, and personal taxes as the key drivers of the crisis reducing disposable incomes by an estimated 7 per cent over two years. Mortgage holders could be even the worst off, and that includes buy-to-let landlords where declines could be higher at an estimated 12 percent.
A small glimmer of light at the end of the tunnel stems from the Bank of England's forecast that energy prices won't continue to rise so quickly as they did last year, helped by the Government's caps on energy bills for households and businesses over a further six months, but also a possible halving of inflation by the summer.
Supply problems that have been pushing up materials and finished goods prices will start to ease in the coming months. That's because some of the pandemic induced production difficulties businesses have faced are starting to ease. At the same time, with recession looming, the demand for goods and services in the UK will likely fall off, helping prices to stabilise.
Interest rate hikes
Since the start of last year the Bank of England has raised its benchmark rate nine times to combat rising inflation which has the unfortunate effect of pushing up borrowing costs and boosting mortgage rates. The alternative would be to let inflation rip, and past experience has shown that that would be disastrous.
The lucky few
The only group set to increase its income over this troubled period is likely to be the richest 5 percent of UK households, in particular those without mortgages. For some in this fortunate position, rising interest rates will add to income.
Unfortunately for the others, as Jennifer Dixon, chief executive officer of the Health Foundation says:
'The cost of living crisis is disastrous for family finances, particularly for those on low incomes and families with more than two children. The crisis is causing immediate damage to the nation's health.'�
Particularly for those at the bottom end of the rental market, heating as well as eating becomes problematic. Living with insufficient heating not only produces health hazards such as condensation and mould, going without sufficient nutrition leaves those affected in a vulnerable state.
According to the Health Foundation, of the poorest 20 per cent of working families, more than one-third said their health had already suffered through the rising cost of living. On top of that nearly a third say they are worried about their finances over the coming months.
Though the immediate outlook remains uncertain, with a war that could go either way the hope is that wholesale natural gas prices will continue to fall, as other sources are found. This will have a dramatic effect on the inflation rate, bringing it down faster than expected and easing the strain on households.
Cliff-edge mortgage hikes
Meanwhile some landlords face a cliff-edge with their buy-to-let mortgages as investors brace for steep payment hikes. The end of cheap money means that landlords on variable rate and ending fixed rate mortgages are vulnerable to rates not seen in many years. Suddenly a minus 2 percent mortgage rate can jump to over 6 percent
Alejandro Tendero Delicado, an analyst at the financial services company, told BusinessTimes.com:
'Borrowers of loans whose fixed-rate periods end within the next two years will feel the pinch earlier and more significantly, as the loans move to a standard variable rate or are locked in at a higher interest rate, [they] may face the brunt of higher interest rates in the medium term once their fixed-rate periods end.'�
Landlords are more exposed to rising mortgage rates than other borrowers, says Savills, because many have interest-only loans that feed through rate changes quickly. In January the average buy-to-let mortgage could be fixed for two years at just over 6 percent, down from nearly 7 percent last October, after the mini-budget. However, the rates are now coming down quite quickly again.
Daniel Chard, a conveyancing solicitor at Bird & Co Solicitors, told BusinessTimes.com:
'Over the last few months, we have witnessed a steep decline in the number of buy-to-let mortgage deals and have seen a number of landlords having to either sell up or raise rents.'�
Some landlords will be looking to exit the market before April when Jeremy Hunt's cut to capital gains tax allowances comes into effect. After April tax emptions will be more than halved, from �12,300 to �6,000 and then cut again to �3,000 after April 2024.
The exodus will only go to speed-up the short-term decline in propriety values while creating greater shortages of rental properties and increasing rents. However, increases in rents are unlikely to cover the full increased costs faced by the worst affected buy-to-let mortgage borrowers, especially as many tenants will be struggling to pay higher amounts.
These adverse conditions facing private landlords are only going to worsen the housing crisis facing a Government that has brought in measures over the last few years that make renting out property far less profitable '� a crisis of its own making.
For those landlords who are mortgage free, or who own properties within a limited company, things could be far different. Many will be in a position to expand their portfolios at bargain prices soon.