Now the credit crunch is hitting home
Evidence is growing that higher interest rates, utility prices and food bills are forcing consumers to cut back. By Martin Hickman
Wednesday 16 April 2008
Britain's decade-long era of "spend, spend, spend" has ended with a bump, according to polling published today, revealing millions of households squeezed by the credit crunch are cancelling holidays, DIY projects and shopping trips.
In a sign that the hangover for the nation's collective credit party has begun, rising utility, food, tax and mortgage costs have so reduced disposable income that 28 million adults have cut their discretionary or luxury spending.
The big summer holiday is the biggest casualty, with 20 per cent of people trimming spending on their annual break, perhaps by staying at home or by going somewhere cheaper, or cutting short their stay.
Some 16 per cent have cancelled DIY and home improvements such as decorating or an extension, while 11 per cent have stopped or reduced saving.
One in 10 people have scrapped a plan to buy new clothes, jewellery or footwear; a new car; or household furniture and furnishings.
Hardest hit are those who have borrowed heavily to buy a new home: the young, singles and families with young children, according to the poll of 2,000 adults for Mintel's annual lifestyle survey.
The research, conducted in February, is one of the first pieces of evidence that the public are changing their behaviour to take account of the economic slowdown.
Peter Ayton, Mintel's chief statistician, said: "People are clearly starting to get a sense that things are not as easy financially as they once were.
"In light of the credit crunch, borrowing has now become harder and we are likely to see even more people having to make sacrifices when it comes to their spending in the future."
In the poll by GFK NOP, most people, 57 per cent – equating to 28 million adults – said they had not bought something they wanted in the past 12 months because of concern about their household finances.
Of the factors slowing spending, the biggest, cited by 44 per cent of people, was the rise in the cost of day-to-day living. One in six said they had received some big household bills; had seen their income plunge for another reason; or just felt they should be more careful in their spending.
Above-average rises in council tax, water and energy bills have pushed their overall cost to £2,510 compared with just over £2,000 two years ago, according to Mintel. Once average phone bills are included, the average monthly utility bill passed £3,000 for the first time, hitting £3,169.
At the same time, tax as a proportion of income has increased from 17 per cent in 1997 to 21 per cent in 2007. And mortgage capital and interest repayments have more than trebled, rising 213 per cent, to the point where £1 in every £4 of consumer spending goes on mortgages. "The days of cheap, easy credit are history. Banks won't lend to each other, they're frantically shoring up their retail deposits to stabilise their exposure to bad debt," the report said.
"In the meantime, consumers who have binged have been left with a nasty hangover, aware that lenders are beginning to circle around their bad risks, reducing their credit limits, putting up the cost of borrowing and refusing loan extensions."
Predictions that more people would experience harder times this year also came from another source. The debt management firm TDX Group estimated that the number of people taking out debt management plans and IVAs (individual voluntary arrangements, a way of paying back personal debts) could double from 400,000 in 2007 to 800,000 in 2008.
About one million people are thought to be struggling with unsecured debt, collectively owing £25bn, or an average of £25,000 each, according to the company. About 60 per cent of that is owed on credit cards, with the remaining 40 per cent borrowed through other means, mainly personal loans.
How Britons are tightening their belts
While many of us see an annual holiday as essential rather than a luxury, one in five people – or12 million Britons – say they will cut back on a summer break. Young people aged 15 to 34 are more likely to go without a holiday. "The likelihood is that holidays will still be taken but inevitably in the form of cheaper options, or else shorter-duration breaks which match the household cash-flow," the report says.
DIY chains are suffering because householders considering big projects are no longer holding the "security blanket" of rising property values. Older people, in particular, are more cautious. On the upside, demand for low-cost cosmetic improvements may rise as people stay put.
The young, singles and families with young children are putting off saving to pay for every day living expenses. Saving is an easy target for cutbacks, having achieved a "nice if there's some spare cash" status, according to the report. One in 20 has cancelled plans to top up a pension.
One in 10 people have cancelled a trip to buy clothes. The worst-hit are those who buy most clothes – young single people and large families. Discount stores offering fast fashion as a "self reward" are likely to escape the worst of the crunch, while more expensive designer labels suffer in the credit slowdown.
New car registrations have been falling for years, partly because people are opting for second-hand, nearly-new models. Now, lower incomes and higher petrol prices mean fewer people are seeking finance for a new car. Eight per cent of the population have scrapped plans to buy a new main car.
New sofas, chairs, tables, beds, curtains and blinds have been put on the back-burner by families squeezed by rising bills. Nine per cent of people have scrapped plans to buy one of these items, making furniture and furnishings the sixth biggest area of cutbacks after holidays, DIY, savings, cars and clothing.
Cinemas, restaurants, pubs, bars and nightclubs have all suffered as people trim their discretionary spending. Although a limited amount can be saved by staying at home, 7 per cent of people have cancelled at least one night out. People may trade down, from the theatre to the cinema, or from fine to casual dining.
Another lesser casualty is the weekend spa or city break in Britain, or the short-haul trip to a European capital. Spring and autumn trips either side of a summer holiday may be sacrificed to ensure families can afford their main break. One in 20 of us – about 2.5 million people – have cancelled such plans. More may cancel if their credit card limits are cut.
Five per cent of people have postponed plans to buy a new computer, but IT is predicted to be one of the least affected areas of the economy because new purchases are often made to replace broken equipment. More susceptible, says the report, is the leisure electronics market. Many may have to give up their dream of owning a flat-screen plasma television.
Daytrips to the seaside or theme parks have suffered a little less than more expensive weekend breaks. "These are mainly impulse-driven expenditures, yet in the roster of day-to-day housekeeping priorities, they represent some of the more expendable areas of spend," the report warns.
Stavrakis Georgiou, 29: 'A housing crash wouldsuit some of us just fine'
Mr Georgiou is a drama student who is struggling to pay his college fees
"They say the life of a student is one of leisure, but that's not how it feels right now," he says.
The cost of living is making it impossible for him and his fellow students to afford their fees. "It's coming close to a situation where we're forced to drop out because studying costs too much. You get to the end of each week and suddenly there's nothing left over in your pocket. Rent is up, food is up, water, gas, and electricity are up. Even over just the past six months, my disposable income has shrivelled completely".
Mr Georgiou is looking for work in several areas but because of his studies, can't commit to a full time job. "I'm putting my CV forward to temping agencies, trying to get a few shifts here and there. I'm also looking at working as an extra in any productions that need them. I have to do something, because the loans that most students live off are becoming much harder to get hold of. And I don't want to be in debt forever".
Mr Georgiou says that he was planning to take out a mortgage and try to get on the property ladder but has given up hope now.
"Politicians don't realise how scary it is for people on low incomes thinking about buying property. Frankly a housing crash would suit some of us just fine."
High street banks, says Mr Georgiou, deserve our ire for their role in creating the current economic climate. "The behaviour of banks is disgraceful: they cream huge profits out of us, but when we really need the liquid cash they say they're not interested. It's hopeless".
Sonia Reid, 57: 'My own income is too modest to survive on'
Ms Reid works in a church on a modest salary. She was recently widowed, and is now using up her savings and cancelling her holiday
"When my husband died I thought that with a small income and some savings I would be able to survive. But with weekly bills growing all the time I'm eating into my savings far earlier than I had planned to," Ms Reid says.
Increasingly, she is forced to depend on her adult daughter, who also has a young child to support.
"I am working hard but my own income is too modest to survive on, and I won't find it easy to get into another career, even though I may want or need to. Instead I'm sitting down and doing a budget, writing down my daily expenses and seeing what I can do without," she added. This year she won't be visiting family in Jamaica.
Ms Reid says: "You find yourself converting the cost of a plane ticket to the Caribbean, at least £420, into the number of weeks of gas, electricity, and water that money will buy. Then you realise one is dispensable, but the other is not: survival comes before luxury."
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