Thursday 13th December 2018
It’s still talked about today and mentioned in the headlines, but the financial crisis happened a decade ago. How has it affected finances? And what can we learn from it?
The 2008 global financial crisis is often referred to as the worst financial crisis since the Great Depression in the 1930s. It began with the subprime mortgage market in the US in 2007 and developed into a banking crisis, with investment bank Lehman Brothers famously collapsing in September 2008. Excessive risk-taking by some banks meant the crisis reached global proportions.
Governments implemented fiscal policies and undertook bail-outs to prevent a possible collapse of the financial system. Here in the UK, the government announced a £37 billion rescue package for Royal Bank of Scotland, Lloyds TSB and HBOS, the economy experienced a recession for five quarters, and an austerity programme was adopted by the government.
In his most recent Budget, Chancellor Philip Hammond may have announced that austerity was over, but some figures suggest the 2008 financial crisis is still having an impact.
The financial crisis affected many areas of the UK economy. These five may have impacted your personal finances too:
1. Salaries: When you just glance at average wages and salary growth over the last ten years, it often looks like we’re better off. However, inflation has eroded buying power and, in many cases, mean people have less income in real terms today than they did before the financial crisis.
In fact, analysis conducted for the BBC found that people’s wages are 3% below what they were a decade ago. The research suggests that the average wage in 2008 was £24,100, falling to £23,300 in 2017. The younger generation has been among the hardest hit, with a decline of 5%.
2. Interest rates: In response to the recession, the Bank of England decreased interest rates. At the end of 2008, the base rate was 3%. However, this fell sharply to 0.5% between then and March 2009. The interest rates have been at a historical low ever since and have only begun to climb again in the last 12 months, now sitting at 0.75%.
How this has affected you will depend on your circumstances. If you have cash in savings accounts it’s likely it’s been decreasing in value in real terms, as inflation has outpaced interest rates. However, the low interest rates have had a positive impact on some. If you’ve borrowed money, for example, a mortgage or loan, it’s likely you’ve benefitted from rates remaining low.
With two small rises in the last 12 months, it’s expected that interest rates will slowly begin to climb again. But they still have some way to go before they reach pre-financial crisis levels.
3. Stock markets: The impact the financial crisis had on stock markets support the long-held wisdom that staying invested throughout volatility is important. Many people that held investments between 2008 and 2009, saw the value of their stocks and shares fall. However, overall the market did recover and, ultimately, delivered returns in the long term.
The FTSE 100, an index that measures the performance of shares of the 100 largest companies listed on the London Stock Exchange, for example, had a share price of 6,202 on 11 January 2008. By the 20 March 2009 it had fallen 3,842.85; a significant fall for investors. But those that continued to hold their shares will have seen the value rise again. As of 9 November 2018, the FTSE 100 price stood at 7,105.34.
With the markets experiencing some volatility recently, the recovery since the financial crisis demonstrates that, in many cases, holding investments long term is the answer.
4. Property: One of the sector’s hit by the financial crisis was the property market. Prior to the financial crisis, the UK had experienced a period of rising house prices. However, the trend quickly changed in 2009. Official figures show the 12-month percentage change to February 2009 was 15.6%. It caused concern for many homeowners and even left some with negative equity, especially those with high LTV (loan-to-value) percentage mortgages.
The dip was relatively short-lived, and prices began to climb again later that year. Since then, there have been peaks and troughs, but when you look at the overall trend, they’re increasing. As of September 2018, the average house price in the UK is £253,554, according to the UK House Price Index. In September 2009, it was £165,134.
5. Regulation: Perhaps one of the most lasting effects of the financial crisis has been the regulation put in place in an attempt to prevent a similar situation happening in the future. Lending institutions have been forced to take on more responsibility to ensure those they’re lending to can afford to meet repayment obligations.
One sector where this is evident is the mortgage industry. When you apply for a mortgage, banks must take steps to ‘stress test’ your situation to see how likely you are to cope should interest rates begin to increase. You’ve probably heard that mortgages and other forms of borrowing are harder to access now, this is the reason why, although it is becoming easier.
While the UK has slowly recovered from the financial crisis and continues to do so, there are still some effects being felt in terms of personal finances and the wider economy. When you look at the uncertainties present now, such as Brexit, and consider how your money will be affected it can be a concern. If you’re worried about your money, please contact us. We create bespoke strategies with your goals and personal circumstances in mind.