Money is being squeezed tight…and the young are hardest hit

It was the year Donald Trump announced the launch of his successful presidential campaign; the year Princess Charlotte was born; and Adele made her comeback as a musician after a long hiatus.

But what we could not have realized at the time is that 2015 marked the beginning of a financial golden age that would last five glorious years.

According to exclusive research conducted for The Mail on Sunday by asset manager Interactive Investor, 2015 was the first time EVER that less than half of an employee’s average salary was swallowed up by meeting essential housing, utility and food bills – leaving enough left to save and spend on luxuries and vacations.

During this five-year sweet spot, says Interactive, food took up 12 per cent of the £27,560 average salary, while utility bills took up just 4.6 per cent and mortgage payments accounted for 28 per cent. A total of just under 45 percent.

Today, the equivalent portion of salary paid for these basic needs is 66 percent. And with interest rates high here for the foreseeable future — and mortgage payments rising as many homeowners move away from cheap fixed-rate loans — this rate is likely to rise rather than fall.

However, the current pressure on household finances, which is felt especially by young people, must be placed in historical perspective.

Interactive’s Alice Guy, who compiled the analysis for the MoS, says: “Those who began their adult lives in the 1970s and 1980s will remember a time when their finances were so tight that by the end of the month they were barely had money to get together.

“Treats like dining out were a rare luxury, while many people’s annual holiday was a day at the coast or a few nights away in a B&B.”

The data Guy analyzed, from the Office for National Statistics and the Building Societies Association, shows that in 1990 more than 92 percent of the median salary went on housing, energy and food bills.

From the 1970s to the early 1990s, interest rates were consistently in the double digits, while inflation dwarfed the current rate of 8.7 percent. For example, inflation in 1975 was 25 percent, while base and mortgage rates reached 17 and 15 percent, respectively.

But according to Angus Hanton, co-founder of think tank the Intergenerational Foundation, such historical analysis obscures the fact that today’s young people are under acute financial pressure, especially when it comes to housing.

He says: ‘There is a big difference between now and the 1970s. Back then we had much lower house prices. For example, I bought a house for £17,500 in 1983, which would be worth £51,000 today if it had risen in line with inflation. But a consistent rise in house prices over the past 40 years means that the current value is more than 20 times higher, at just over £1 million.’

He adds: ‘The high interest rates are also biting harder because we have encouraged young people to borrow to the limit.’

One of the traditionally largest household expenses that costs significantly less today is food. The weekly grocer has taken less and less of our income since 1970, when workers spent 39.5 percent on food. Today, the average worker only needs 11.5 percent. Hanton says: ‘Now you have Lidl and Aldi, for example, who keep prices sharper. These discount stores provide competition. There used to be more of a monopoly in the food retail market, which kept prices higher.’

Interactive’s Guy agrees. She says the era of large supermarkets with economies of scale, combined with modern farming methods, has helped reduce the costs of a family food store over the past 50 years.

However, the price of food has increased by 18.4 percent in the past year and takes up a much larger share of income.

Hanton warns: “Many young people have become accustomed to eating out regularly, but that is becoming increasingly unaffordable.”

An energy crisis has further troubled households over the past year, with costs far exceeding inflation.

Households saw energy bills double last winter to £2,500 a year for an average home. More than 7.4 percent of people’s income is now used to cover energy bills – the highest percentage since 1985. Between 2000 and 2020, energy costs never exceeded 5 percent of average income.

At the end of last month, the boss of energy supplier Centrica warned that energy prices would remain stubbornly high. The past 30 years have changed the generation that has been hardest hit by the rising cost of household necessities.

says Hanton. In the 1990s, retirees were the most likely generation to live in poverty. Nowadays retirees live much more comfortably thanks to the triple lock of the state pension, universal benefits, guaranteed income from working pensions with fixed benefits and the comfort of equity built up in their home.’

He says one in four people over 65 live in “millionaire households” when housing and retirement assets are taken into account.

On the other hand, a record number of people in their twenties are going back to live with mom and dad because they simply can’t afford to live independently. Hanton says so-called millennials, born between 1985 and 1995, are “hit from all sides.”

He says they have to spend more on things essential to daily life than their parents did. “Beware of the moans about wasting their money on cell phones, laptops and the internet. These items are now essential to finding and staying in work,” he added.

Additional costs, such as student loans and childcare costs, mean that many young people have to survive on a small budget.

Every generation feels they should win the prize for facing the toughest financial headwinds.

There is no denying that between 1970 and the early 1990s, a larger share of household income was spent on food, energy and housing costs. But today’s young people face unprecedented financial challenges. They should not be forgotten.

If only we could go back in time to 2015.