Why we must be prepared for tougher times ahead: Sarah Coles

I’m not saying I’ve sunk into pessimism, but I saw my first snowdrops of the year last weekend, and instead of thinking of green shoots of hope and renewal for 2024, my immediate thought was that the frost was bound to kill them.

It’s hardly a surprise: we haven’t had much to be optimistic about recently. It’s why so many of us have battened down the hatches and tried to hibernate until better times turn up.

Unfortunately, for an enormous number of people, staying pessimistic, and keeping a tight lid on costs, is going to be your most sensible move right now.

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We’ve just published the HL Savings & Resilience Barometer. It measures everything from savings to debt, pensions to investments, and how much money we have at the end of the month. Overall, it found we’re worse off than we were this time last year.

Chancellor of the Exchequer Jeremy Hunt must hope the National Insurance cut will prove popular. (Photo by Daniel Leal/PA Wire)Chancellor of the Exchequer Jeremy Hunt must hope the National Insurance cut will prove popular. (Photo by Daniel Leal/PA Wire)
Chancellor of the Exchequer Jeremy Hunt must hope the National Insurance cut will prove popular. (Photo by Daniel Leal/PA Wire)

It’s the relentless rise of prices that have done so much damage – and the fact that the cost of living has increased 18.4% in the past two years. This has been felt particularly keenly by those on lower incomes. They were less able to build up lockdown savings during the pandemic. They were also less likely to have investments or own property – both of which increased in value – so by the end of the peak of the pandemic, they were worse off.

As they emerged from one crisis, they were then plunged into another, and the rising cost-of-living has taken a toll on their resilience. They already had less room in their budgets, but were hit harder by rises in the cost of the essentials – including a 23.9% increase in the cost of food and non-alcoholic drink.

Increasingly, they’ve spent any savings and cut every cost, and a worrying number have run out of road. Debt anxiety and arrears are a growing concern. More than a quarter (27%) of the lowest earners are in arrears, while over a third (37%) have debt worries. It’s easy to see why, because their debt repayments are painfully high compared to their incomes. The lowest fifth of earners have average debt repayments (excluding any mortgage) of £168 a month.

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This is bad enough, but there’s every chance it will get worse. The National Insurance cuts seem to offer hope, but once you subtract the extra tax caused by frozen thresholds, the average earner is £13 a year better off, and those on lower-than-average incomes will actually be worse off. They’re also likely to suffer if there are no more cost-of-living payments announced after the final one in February 2024. It means there’s a risk they’ll continue to turn to debt to make ends meet, and for more people to fall into arrears.

If you were feeling pessimistic when you started reading this, you’re unlikely to be feeling any better now. However, if you’re on average, or above average, earnings, there’s slightly more reason to be cheerful.

The highest earners saved more during lockdowns, saw decent wage rises, and cut back on luxuries to keep their costs down. As a result, 86% are rated as ‘good’ or ‘great’ for overall financial resilience. Looking to 2024, they gain more from the National Insurance cut too, so it’s no wonder they’ve started putting more into savings.

For average earners, there have been some improvements in their debt and savings position in recent months – as slower inflation and recovering wages have brought a few inches of spare space to people’s budgets. In 2024 they also stand to gain from slower inflation, the National Insurance cut and the expected cut in interest rates, so the Barometer forecasts a modest improvement in disposable income. If all the talk of looming tax cuts comes to fruition, there’s every chance they will benefit here too.

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Unfortunately for the pessimists, there are still some major risks for average earners – particularly those who own their own home. If house prices keep falling, it will put them in a more precarious position: not just because of the risk of negative equity, but also because it will cut the value of the property assets they hold, which puts them on a less firm footing as they go into retirement. Those who need to remortgage from a fixed rate in the coming year will benefit from recent cuts in mortgage rates, but will still see a painful leap in their monthly mortgage payments.

It means we need to be prepared for whatever 2024 holds in store. Higher earners should revisit the things they did when times were toughest – whether that was spending savings or cutting pensions or investments. Now’s the time for this group to get back on track.

For middle earners, if wiggle room opens up in your budget, it’ll pay to think carefully about the best use of this additional money. If cash remains tight, your focus should be on making ends meet, and avoiding building problems for the future. For lower earners, this year will be a matter of getting through another tough 12 months. If you’re already struggling, now is the time to ask for help. Debt charities like Stepchange and National Debtline can be a useful place to start.

For some of us there will be snowdrops in 2024, and for some of us there will be frost, so it’s worth being prepared for whatever the coming year has in store for you.

House prices

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Average house prices across the UK were down 2.1% in the year to November, which is the fastest annual drop since 2011. Yorkshire and the Humber fared much better than average, with a fall of 0.8%, but still saw prices slide.

It reflects just how dire things were at the tail end of the summer, when so many of these sales were agreed. Mortgage rates reached a peak in August, and many buyers struggled to borrow as much as they needed. Over this period, sales ground to a halt, so an awful lot of sellers were forced to cut their prices in order to shift their home.

There is a small glimmer of hope, because mortgage rates have continued to drop, and the average 2-year rate has fallen to 5.62%, according to Moneyfacts - a full percentage point lower than it was four months ago. Even the big lenders are offering rates below 4%. It means we could see a pick-up in demand when the figures for December and January come in.

However, sellers shouldn’t get too excited. This week’s surprise rise in inflation, combined with concerns about oil prices and the supply of goods as a result of conflict in the Red Sea, could put the brakes on mortgage rate cuts. When you consider that the UK economy is teetering on the brink of recession, there’s every chance that the property market has some seriously tricky months on the way, so this may not be the last price fall of 2024.

SARAH COLESHead of Personal Finance and Podcast Host for Switch Your Money OnHeadline Money Expert of the YearHargreaves Lansdown

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