A Decade Of Financial Fashions

Labour has been in power for ten years, so we review the financial trends of the past decade. How things have changed!

Ten years ago, Tony Blair entered 10 Downing Street as the first Labour prime minister for eighteen years.

There's no doubt that the 1997 election marked a major turning point in the British political landscape. However, I'm paid to be a financial commentator, not a political pundit. Hence, I'm going to review ten years of Labour rule by examining how five key elements of our personal finances have changed in the decade of Tony Blair and Gordon Brown. Here we go (in alphabetical order):

1. House prices shot up

Before the 'Tony and Gordon Show' began, house prices had been dipping for years. According to the Halifax, the price of an average UK property fell from £69,850 in mid-1989 to £61,564 in mid-1995. That's a fall of 12% in six years, which shows that house prices don't always go up -- contrary to popular opinion.

Then again, since mid-1997, house prices have rocketed. According to the Halifax, a typical home costing £68,042 in mid-1997 would sell for £192,314 in March 2007. So, the average house now costs more than 2½ times what it did a decade ago, having risen by 161% in 9_ years.

Thus, Tony and Gordon may be remembered as the overseers of the biggest house-price boom (and increase in property wealth) in British history. However, Blair won't be around for much longer, leaving Brown to shoulder the blame for any future crash!

2. Inflation is rising

Inflation is the tendency for the prices of goods and services to rise over time. As I explained in this article, we measure inflation in the UK using three key indices: the Consumer Prices Index (CPI), the Retail Prices Index (RPI) and the Retail Prices excluding Mortgage Interest Payments Index (RPIX). As the CPI excludes housing costs, I tend to look to the RPI to see how prices are rising.

When Tony and Gordon took over, the RPI stood at 2.6%, which means that the cost of living rose by 2.6% between May 1996 and May 1997. Over the past decade, the RPI has varied from a low of 0.7% in December 2001 to a high of 4.8% this March. The average RPI since May 1997 is 2.7%, so inflation is currently at a sixteen-year high. Oops.

3. The base rate stayed low

One of Gordon Brown's first acts as Chancellor was to give the Bank of England independence by making it responsible for setting interest rates. Thus, since 6 May 1997, the Bank's Monetary Policy Committee (MPC) has set its base rate free of political interference.

In historical terms, the base rate has been remarkably low over the past decade. It peaked at 7.50% between June and October 1998, and the low point was 3.50% between July and November 2003. In the decade before the formation of the MPC, the base rate peaked at 15% during October 1989 to October 1990. Indeed, today's base rate of 5.25% is the same as the low for 1987-97, which was reached in 1994, so you can see that we've benefited from a decade of low interest rates.

By the way, the Bank of England is sure to raise its base rate on 10 May in order to curb inflation, so you should brace yourself for a quarter-point or half-point increase on Thursday...

4. Mortgages rocketed

Of course, just as house prices have rocketed over the past decade, so too has our mortgage debt. In May 1997, we owed £419 billion to mortgage lenders. Today, our housing debt has soared to £1,104 billion. In other words, our mortgage debt has grown at roughly the same rate as house prices, rising by 164% in just short of ten years.

With 11.7 million mortgages outstanding in the UK, the average mortgage debt is now £94,350, which explains why so many people are feeling the pinch of recent interest-rate rises.

5. Non-mortgage debts soared

As well as shelling out a fortune on houses, we've been splurging our cash on other goods, too. In May 1997, we had £84 billion of unsecured (non-mortgage) debt, which includes credit cards, personal loans and overdrafts. Today, this figure stands at £214 billion. So, over the past 118 months, we've put an extra £130 billion on the slate, or roughly £1.1 billion per month. To me, this suggests that we have a long-term problem with living below our means. Agreed?

As you can see, despite the economy enjoying an unprecedented period of stability and growth, our personal finances have suffered because of our reliance on spending tomorrow's money today. Ideally, I'd like to see a greater emphasis on building future financial security through saving and investing, so I'll revisit this topic later this week.

Here's wishing you the best of financial fitness for the next ten years!