Housing is at the heart of the financial squeeze families are facing

We’re more than two years into the cost of living crisis, and some politicians are cheering its end off the back of falling inflation. However, given that more families say their finances have got worse, not better in recent months, these politicians risk looking out of touch. Indeed, according to the Resolution Foundation, the average UK household is set to be £1,900 poorer by January 2025 than they were in December 2019.

The early phases of the crisis were marked by a surge in energy prices, spiralling food prices and soaring interest rates. The government rightly prioritised low-income families, with measures such as cost of living payments. But the main response to high inflation came from the Bank of England. After 14 consecutive interest rate rises, in September 2023 the Bank froze the interest rate at 5.25 per cent.

Experts disagree on the time it takes for rate rises to have an effect on the economy. Over the past 18 months households have enjoyed a £16 billion income boost as the gains from higher savings have come through quicker than higher debt servicing costs, but the negative impact of so many rate rises has been apparent for anyone having to remortgage in the past year or so. Falling rate expectations are bringing down mortgage rates, but the 1.5 million households who need to remortgage this year will still see their payments rise by £1,800 a year on average. And while rising rates have cooled house prices, they have not cooled rents, which have been increasing at their fastest rate in more than a decade.

Soaring rents and remortgaging costs have put housing at the heart of the financial squeeze families are facing. Our recent cost of living survey found that more than two in five households reported an increase in their housing costs in autumn 2023. Increases were most common among renters in social housing and private tenants (54 and 43 per cent respectively). Of those affected, mortgaged households have taken the biggest financial hit: their housing costs have increased by 23 per cent on average.

Housing costs are of course highly variable, in contrast to the more universal nature of food and energy bill rises. After all, everyone has to heat their home and put food on the table. Those lucky enough to own their home outright will have experienced no increase in their housing costs, while many with a mortgage — especially first-time buyers, who tend to be younger and more highly leveraged than other homeowners — will have had significant repayment increases if they had to remortgage.

The better news for these households is that banks are often flexible when offering support, from mortgage holidays to extending terms to reduce monthly payments. Those renting aren’t so lucky though. They are at the whim of their landlords, who can impose huge rent rises or evict those who fall behind on their payments.

The easiest way to cope with higher housing costs is to earn more — improving real wages and falling inflation will make a difference for many people. But pay rises are not universal. While those on the minimum wage will see their hourly pay rise by 10 per cent in April, most people will receive more modest increases. For some there will be no rise at all.

The variations in rising housing costs and rebounding wages — and the interaction between the two —tell us where the cost of living crisis is most likely to bite. Recent research at the Resolution Foundation identified about one in seven “housing-pinched” families whose housing costs have gone up but their pay hasn’t. Two thirds of these families say they are worried about their financial future.

As we try to navigate this uncertain phase of the crisis we need to look beyond the averages to see where the pressure points really are. Yes, it is good news that inflation is falling, but the financial burden of rent renewals or the need to remortgage will continue to loom over millions of households.

This article was originally published in The Times.