A Treadmill Built For Two

Thanks to high house prices, most families need two incomes to make ends meet. Are we doomed to a lifetime of drudgery?

Almost half of all British families need two or more salaries to cover their bills and live reasonably well -- that's according to life insurer Scottish Widows.

Indeed, more than half (51%) of families with two or more children say that they could not make ends meet without two salaries coming in. Thus, thanks to financial pressures, many mothers who would prefer to remain at home to care for their small children are forced to return to part-time or full-time work.

Furthermore, the average two-child household has mortgage and other debt totalling £100,000, compared to an average debt of just £82,000 for couples with no children. Even more worryingly, Scottish Widows' survey found that a quarter of families have no savings whatsoever, so they have no cash cushion to fall back on when times are hard.

When you add in the high cost of housing and childcare, falling disposable incomes after taking account of inflation (which is at a sixteen-year high), high levels of mortgage and other debt, and rising interest rates, you have a potent cocktail of problems for today's families. Also, having two working parents doubles the risk of a breadwinner becoming unemployed or unable to work due to illness.

What's to blame?

If I had to lay the blame for our increasingly stressed family finances, I'd place it firmly at the door of sky-high house prices. With the average home costing upwards of £192,000 in March 2007 (according to the Halifax), first-time buyers and homeowners moving on up are borrowing ever-greater amounts to make their sums add up.

Indeed, the typical mortgage debt is now almost £95,000, or roughly 2½ times what it was ten years ago. When you add in an average of £8,600 of non-mortgage debt per household, a typical homeowner could easily owe a hefty six-figure sum to lenders. And, with interest rates are on the rise, times are set to get tougher for borrowers nursing big debts.

What's more, it smacks of desperation when buyers find it necessary to borrow four, five, even six times their pre-tax income in order to grab the next rung of the property ladder. To me, other warning signs include forty-year home loans, 100% to 130% mortgages (where you borrow more than your house is worth), plus the rising popularity of interest-only mortgages and 'share to buy' loans.

As I warned in A Decade Of Financial Fashions, today's interest rates are low when compared to those seen in the previous two decades. A rise in the Bank of England's base rate to 6% a year could see standard variable rates for mortgages hitting 8%, putting millions of households under even greater pressure.

Quitting the treadmill

As an alternative, I offer an easy recipe for a happier family life. It simply involves spending less than I earn, steering clear of personal debt, having a large cash safety-net to rely on when the chips are down, and investing as much as I can in the stock market to build future wealth. In addition, I'm happy to sit on the sidelines in a rented property while the rest of the UK borrows up to the hilt.

The rest of you can get rich by merrily selling increasingly expensive houses to each other, but bear in mind this warning from respected economist John Maynard Keynes:

"Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done."

Finally, I've wrongly called house prices since 2003, so feel free to ignore me. Nevertheless, I remain absolutely convinced that this modern-day Gold Rush will soon end, so please think twice before agreeing to mortgage yourself up to the hilt. When the housing bubble bursts, it'll be Devil Take The Hindmost, with the very last entrants suffering the most!