Cost of living crunch to deliver shock to UK households’ balance sheets

Households’ balance sheets are set to be tainted by problem debt this year, driven by the worsening cost of living crunch forcing Brits to turn to credit cards to pay bills, reveals fresh analysis published today.

Accelerating inflation over the course of this year is likely to spark a jump in unsecured lending, credit that typically carries higher interest rates, according to consultancy EY.

Anna Anthony, UK financial services managing partner at EY, said: “Households are already feeling the cost of living squeeze and unfortunately this is set to worsen over the coming months, with inflation set to hit a 40-year high.”

Credit lending is forecast to swell to a five-year high of 7.9 per cent, or £16bn in net terms, this year, unwinding a drop of 12 per cent of risky borrowing during the pandemic.

Household debt tumbled during the Covid-19 crisis, caused by consumers using money that would have been spent socialising on paying off credit card bills.

Although EY’s analysis indicates household debt is set to climb, damaging future financial health, it suggests consumer spending may hold up well despite inflation hitting levels not seen for three decades.

Consumption is also likely to be supported by Brits tapping their pandemic savings warchests.

Experts have downgraded UK economic growth forecasts on concerns household consumption will drop in response to wages failing to keep pace with an annual inflation rate of over seven per cent.

Prices are already seven per cent higher than they were a year ago, the quickest rise since 1992, but are expected to rise even further, with inflation potentially peaking at 10 per cent in October.

Demand in the UK property market will fall in response to the Bank of England hiking interest rates to tame rampant inflation, EY said.

“Mortgage lending growth, which stood at 4.3 per cent in 2021, is forecast to fall to 3.8 per cent in 2022 and 3.3 per cent in 2023,” the firm said.

House prices have soared since the onset of the virus, driven by prospective homeowners rushing to capitalise on a stamp duty holiday, low interest rates and a change in tastes to favour larger homes in rural areas amid greater use of remote working practices.

Home prices have outripped earnings growth, resulting in the average mortgage in the final quarter of last year being 3.35 times borrowers’ income, the highest ratio since record began in 1992, according to the Office for National Statistics.