Market Insight - August / September 2019
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THE ECONOMY

Spend or save?

Since the UK voted to leave the EU in 2016, businesses, markets and households have all reacted rather differently. Markets moved swiftly, resulting in the weakening of the pound. Meanwhile, businesses, have put plans on hold to see what Brexit really means. Households, on the other hand, have continued spending despite the rise in uncertainty.


Instead of cutting back consumers are still spending, beating many economists’ expectations. But in order to fund this spending households have borrowed more and saved less. During the first three months of the year households spent £6bn more than they earnt – a record tenth consecutive quarter of households being net borrowers.


The proportion of income that households set aside to save has fallen too. The household saving rate fell to just 4.1% in Q1 2019, considerably lower than the 7.8% recorded before the referendum in Q1 2016. In fact, the household saving ratio is at a near record low since the 1960’s.

So what does this mean for the housing market? Saving up to purchase a home is the biggest barrier to homeownership in the UK, and it doesn’t just affect first-time buyers, but movers too. Saving less will increase the time it takes for households to save to save up for a move and this will continue to weigh on activity in the housing market.


The other concern, however, is that the fall in savings reduces household’s resilience in the event of an economic downturn. Consumer spending benefitted from strong income growth during the second half of 2018, but the outlook for the labour market doesn’t look quite so rosy.


With businesses now tailoring their behaviour towards the rising probability of a No Deal Brexit, an uninspired economy and a challenging global environment, the recent record-breaking strength of the labour market may weaken during the rest of 2019. The Bank of England deputy governor, however, thinks households may have reached a turning point and will start rebuilding their savings, having drawn on them following the Brexit vote when inflation ate into people’s earnings.

Household Saving Ratio (%)

Source: ONS

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