Andy Johnson, Client Partner at 4Most, explores the evolving affordability landscape in the UK. The discussion covers emerging trends in consumer spending, the impact of inflation, and the need for real-time data in credit decisioning.
Key topics include the affordability pressures on lower-income households, the ongoing structural changes in consumer behaviour, and how lenders can adapt their models to better assess financial resilience.
Andy provides some critical insights for financial services professionals navigating the shifting economic landscape in 2025.
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Key Takeaways
- Affordability Pressures Persist – The cost of living crisis continues to impact household spending, particularly among lower-income groups.
- Inflation Remains Above Target – Although inflation has peaked, it is still above the Bank of England’s 2% target, disproportionately affecting essential expenses.
- Lower-Income Households Most Affected – Wealthier households can adjust discretionary spending, whereas lower-income groups are already at subsistence levels.
- Cumulative Cost Increases – Small cost increases in food, energy, transport, and other essentials collectively put significant pressure on household budgets.
- Real-Time Data is Crucial – Traditional affordability assessments rely on outdated data, while real-time expenditure tracking provides better insights into financial stress.
- Energy Costs Remain Elevated – Despite peaking, energy prices have not returned to pre-crisis levels and are expected to remain structurally higher.
- Wage Growth vs. Inflation – While private sector wages have grown (~6%), this is still below peak inflation levels, especially for low-income earners.
- Interest Rate Impact – Higher borrowing costs have reduced affordability buffers, making financial resilience a key concern.
- Changes in Consumer Spending – The pandemic has driven long-term shifts in expenditure, such as reduced transport costs and changing spending on work-related expenses.
- Sector-Specific Cost Pressures – Rising costs are not limited to food and energy; water and other essential services are also increasing.
- Challenges in Predictive Modeling – Economic volatility has made historical data less predictive, requiring lenders to adapt their credit risk assessments.
- Regulatory and Policy Implications – Lenders need to align affordability models with evolving economic and policy conditions to ensure responsible lending.
Innovation
- Monthly Affordability Tracking – Real-time data from financial hardship cases allows for a more accurate and timely assessment of consumer affordability.
- Granular Household-Level Data – Moving beyond high-level statistics to segment expenditure trends by household composition and income bands.
- Dynamic Credit Decisioning – Using real-time data to adapt credit risk models and lending criteria based on current affordability conditions.
- Enhanced Stress Testing – Developing forward-looking affordability models that incorporate sectoral inflation trends and household resilience metrics.
Key Statistics
- Inflation remains above 2%, continuing to impact affordability.
- Private sector wages have increased by ~6%, while public sector wages have grown by ~4%.
- In previous affordability stress testing, mortgages were assessed at 5-6% rates, whereas current stress levels are much lower.
- Households in financial hardship are 10% less likely to own multiple vehicles compared to pre-pandemic levels.
- The most recent affordability data is updated monthly, compared to ONS data which is typically a year in arrears.
Key Discussion Points
- The cost of living crisis has led to significant changes in consumer spending patterns, particularly on essentials like energy and food.
- Despite falling inflation rates, cost pressures remain, especially for lower-income households who cannot reduce spending further.
- The impact of inflation is disproportionate, with higher-income households having more flexibility in their budgets.
- Energy prices remain elevated, and while they are not at peak crisis levels, they are unlikely to return to pre-pandemic rates.
- The importance of real-time affordability data in understanding consumer financial health rather than relying on outdated datasets.
- Lenders need to assess affordability dynamically, as traditional fixed models are proving less effective.
- The rise in essential service costs, such as water, is further straining household finances.
- Wage inflation is failing to fully compensate for rising costs, particularly among lower-income groups.
- The financial sector is more capital resilient than in 2008, but affordability concerns persist.
- Changes in consumer behaviour post-pandemic, including reduced spending on work-related expenses and vehicle ownership.
- The financial industry must develop more granular affordability models to account for evolving spending patterns.
- Looking ahead, credit risk will be influenced by continued economic uncertainty and regulatory changes.
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