The cost of living crisis - What will this year bring?
The term cost of living crisis refers to the fall in disposable incomes that the UK has experienced over the last few years, leading to millions living under immense financial stress - battling to keep their homes warm and food on the table as costs soar at every turn. Over the last 12 months, the crisis has dominated the news and political agendas, and sadly, many UK families have faced the unfathomable dilemma of heating or eating as the situation has worsened.
With the year well underway, the United Kingdom continues to grapple with the cost of living crisis, leaving many struggling to make ends meet. This complex challenge encompasses various economic factors, ranging from skyrocketing inflation and lack of affordable housing to stagnant wages, creating a perfect storm within an already precarious financial landscape.
A recent survey by YouGov[1] revealed that 36% of people in Great Britain feel worse off financially compared to this time last year, so can we expect any relief anytime soon?
Let's explore the view for the next 12 months and share advice for those under financial pressure.
Inflation uncertainty
As prices grew quickly during 2023, the UK experienced an unprecedented surge in inflation, which affected the affordability of goods and services. As the year went on, things steadied, but there was an unexpected spike in December - the first increase in the annual inflation rate since February.
Costs continue to climb ahead of wage growth, so this year, it's essential to be realistic about rising living costs and keep budgeting at the top of the agenda.
Low wages and vulnerable populations
Stagnant wages add further fuel to the cost-of-living fire. Despite the rising cost of living, employees across many sectors report minimal increases in their earnings, if any at all. This exacerbates financial stress and leaves much of the population facing the daily dilemma of choosing between basic needs and financial stability.
Vulnerable populations such as low-income families and single parents are disproportionately affected by such economic challenges, leading to increased levels of poverty and reliance on government and social support. It's vital to remember that help is available from banks, lenders and organisations such as the Money Advice Trust, and there is no shame in reaching out for the help you may need.
An ever-changing housing market
The housing market is also a significant driver behind the cost of living crisis, with mounting property prices and increasing rents leaving many unable to source affordable accommodation. The widespread lack of affordable housing, set against a backdrop of high demand, has led to a continuous cycle of housing insecurity. Many are forced to allocate the vast majority of their wages to housing, leaving very little income available for other expenses such as food and transportation.
The forecast is optimistic in this area, too, with Zoopla[2] predicting that UK house prices will fall by 2% based on mortgage rates dropping to 4.5% by the end of 2024. The property market is known for its instability, but one thing remains clear: protecting your most valuable asset - your home - is more vital than ever. However, according to research from leading property rebuild specialist RebuildCostAssessment[3], 80% of UK properties are underinsured, leaving homeowners at risk due to rising rebuild costs.
The increased risk of underinsurance
If a house should be completely destroyed, the typical cost to rebuild a 3-bed, 2-storey, semi-detached home in the UK is now around £296,000, up a whopping 21% from £244,000 at the end of 2021[4]. Despite the prices for repairs jumping significantly in recent years, up to 40%[5] of homeowners aren't aware that the price of a rebuild would need to be updated on a home insurance policy, leaving them open to expensive issues should they need to claim.
In addition to a lack of knowledge regarding rebuild costs, there are other factors behind underinsurance, such as homeowners misjudging the value of their possessions within the home which can come from overlooking items like carpets or light fittings. The cost of living crisis is also having an impact, as policyholders may purposefully undervalue their property or possessions in order to save money on their premiums.
While reducing one of life's many monthly outgoings may seem an attractive prospect, it's seriously counterproductive when it comes to home insurance. If you undervalue your home's contents by £5,000, for example, you'd be left out of pocket if the worse were to happen and you needed to claim following a fire or flood - even more of an issue when things are already tight due to the current crisis.
This year, make it a priority to check in with your insurance provider to make any necessary updates to rebuild costs or possessions value - taking into account inflation on the price of items, such as jewellery or tech. Even better, seek professional advice just to make sure your home insurance is giving you and your home the cover you expect and need. This exercise will protect your home from any additional vulnerability and ensure that you aren't left out of pocket if you need to claim.
[1] YouGov survey Jan 2024
[3] Today's Wills and Probate - RebuildCostAssessment
[4] Average cost to rebuild a house (2024)
[5] Insurance Times - Millions of homeowners at risk of underinsurance
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