Inequality in the UK

UK is leading one global race: it is the only G7 country in which wealth inequality has increased steadily since 2000.

Seemingly unaffected by the financial crisis or subsequent recession, our recent report finds two trends posing a particular danger to the UK economy.

Household debt

After a period of retrenchment UK household borrowing is once more on the rise. Unsecured lending – such as credit card debt and payday loans – is now increasing at a rate of close to £1 billion a month. With real incomes falling for most, it is consumer debt that is helping sustain the UK’s economic recovery.

Secured lending is also on the rise. Although the record pre-crash levels of mortgage equity withdrawal – borrowing against the value of your home – have not returned, government-subsidy schemes such as Funding for Lending and Help to Buy are driving more and more people onto the property ladder, despite stagnating wages.

A steady increase in the size of new mortgages compared with borrower incomes suggests households are becoming more vulnerable to income and interest rate shocks. The Bank of England and the International Monetary Fund (IMF) have both warned that inflated property prices and related household indebtedness pose a real threat to UK financial stability.

While rising private debt has so far had only superficial impact on economic growth in the UK, its effects in compounding inequality are real. The financialisation of households through debt – as a compensation for a lack of pay growth – further burdens those at the poorest end of the income scale, while profits flow up to wealth owners.

Asset price rises

Because the value of property has a strong effect on consumer spending through rising wealth and confidence, much government activity since the crash has been focused on reflating prices. They have done this by subsidising mortgage credit through schemes such as Help to Buy. However, the UK’s housing shortage and its low rate of investment in housebuilding has seen this result in rapidly rising prices.

While the financial crash caused an immediate drop in property prices, the bubble did not fully burst and they soon began to rise once more. Two major mortgage lenders recently calculated prices were last year rising at the fastest rate since the crisis.

Since the crash the shape of the UK housing market has seen London and the South East soar ahead of other regions. The total value of housing stock in these regions has risen by £435 billion over the past five years, with a net loss of £206 billion across everywhere else.

Even in areas where property prices are rising it is not the mortgage-laden households that are the prime beneficiaries. Unaffordable housing has led to the rise of ‘generation rent’, and sharpened the appetite of institutional investors for the lucrative private rented sector. Analysts are forecasting that private renting is on its way to becoming a new major asset class in the UK. Private landlords, including increasing numbers of institutional investors, now own 19% of all residential property – up from 12% ten years ago.

Read our full report on the links between inequality and the growth in scale and influence of the financial sector.

Written by Alice Martin New Economics Foundation