Jonny69
07-05-2007, 11:22
We're led to believe that the economy is very strong in this country and on a grand scale it probably is. I'm having increasing concerns on the state of the economy on a smaller, local, more personal level.
About 10 years ago I was having a grown up chat with my dad, I hadn’t yet moved out fully and was partway through university. We were talking finances, I knew he struggled to support the family in the earlier days but by now we were quite well off in a large 5 bedroom house, 2 cars and dad’s toy in the garage. He estimated that the whole household cost about £35K per year to run which covered everything; mortgage, doing up the house, pets, food, petrol, holidays, going out, the lot. It was a good discussion and I remember it well because it gave me probably the best understanding of what life costs. Unfortunately, coupled with some basic A level maths, it has also given me an insight into how screwed up things might be in this country economically.
Around that time I was a sponsored student at Marconi. Their graduate wage was just under £17K which was considered a little under average but it was still a lot of money to bring in when retail jobs were considerably less. I worked there for a year and during holiday times and they were quite clever the way they paid us as students. Our term-time meant that when we worked a whole year we were paid exactly across two financial years, so we were paid exactly the same amount as our tax code across 6 months and thus paid no income tax. That was plenty to rent a studio flat at £35 per week and run a car.
I’m going to apply my maths bit now and get it out the way because it’s important but complicated. It’s how much something increases in price due to inflation. Inflation on average is about 5% in this country, it goes up and down but across any period of time it is 5%. That means £1 next year is £1.05, £1.1025 the next year, £1.158 the next and so on. Across a 10 year period the price of goods should have risen by a factor of approximately 1.6 (or a 60% increase) and theoretically wages should to too so that we don’t start finding everything very expensive. But have they?
Lets have a quick look at those engineering wages. Non-experienced engineers appear to be able to command a £20K starting salary fresh out of university which I make an 18% increase. According to statistics.gov.uk our wages overall were rising at about 3% in 1998 and cycling every 2 years between 3% and 4.5%. Women’s wages have gone up more than men’s but it is still below that 5% inflation. Does that mean we’re getting poorer? Not necessarily because over that period inflation has actually been quite low but we ought to factor in the housing boom as this is what appears to have screwed everything up. 5 years ago a new one bedroom flat in SE London would have set you back about £80K and the prices were rising rapidly. The same flat will now cost you closer to £190K, a whopping 137% increase.
5 years ago Person A is in a position to buy his first place. He earns £25K per year which sees about £1500 in the bank each month. He comfortably bought his own flat with the mortgage repayments coming in at about £530/month so there’s plenty left over for the rest of life like food, saving for a new car, kids in the future, pension etc. Say person B walks in today and buys the flat next door, he does exactly the same job and wages are roughly the same but to live in the same flat as the guy next door he has to find £1250 per month, way over double the mortgage for person A. Suddenly there’s nothing left to put aside for tomorrow, he can’t afford a car when there’s that much going out, he only breaks even every month, can’t afford a pension and kids? Well forget about it, no chance, there is no way he would be able to afford it.
So we have two equal guys doing the same job earning roughly the same amount but one can afford to live comfortably, go on holiday, put plenty away for later and buy a new car every few years while the other has to struggle to get by. You could argue that you need to factor in a second wage today but then you have two people struggling for the same reasons. The couple in no.32 earn the same amount as the couple in no.33 except one is loaded and the other can just about afford to live there.
So what can we do about that? Earn more, that appears to be the way forward but our economy isn’t as straightforward as that. When one earns more one gets taxed more so to actually land noticeably more in the bank one has to earn considerably more. Then to cover that doubled mortgage repayment one would have to be earning nearly double what the guy next door does to be able to lead the same lifestyle.
Say I wanted to live in the same house as my parents did when I was a kid. My dad earned £30K and the house cost £125K in the late 80’s. Mortgage would have set him back about £650 per month which was a lot then but he was earning enough to cover that. When the house was sold a couple of years ago it went for £455K, below market rate but still netting them £300K for just living there. Today the house next door is on the market at £520K and I am roughly the same age now as he was when he bought it. If I were to buy that house today I would have to be able to find nearly £4000 per month to pay the mortgage, they say that you should only spend about 1/3 of your income on rent or mortgage so I would have to be earning over 120K to be able to afford that. It’s clear then that young people will never live the same lifestyle ad their parents did and it is only set to get worse.
Is that the sign of a strong economy? I’m not convinced. But next time the young guy in the office says he has no money at the end of the month just bear that in mind, as he probably didn’t pour it all down his throat in the pub.
About 10 years ago I was having a grown up chat with my dad, I hadn’t yet moved out fully and was partway through university. We were talking finances, I knew he struggled to support the family in the earlier days but by now we were quite well off in a large 5 bedroom house, 2 cars and dad’s toy in the garage. He estimated that the whole household cost about £35K per year to run which covered everything; mortgage, doing up the house, pets, food, petrol, holidays, going out, the lot. It was a good discussion and I remember it well because it gave me probably the best understanding of what life costs. Unfortunately, coupled with some basic A level maths, it has also given me an insight into how screwed up things might be in this country economically.
Around that time I was a sponsored student at Marconi. Their graduate wage was just under £17K which was considered a little under average but it was still a lot of money to bring in when retail jobs were considerably less. I worked there for a year and during holiday times and they were quite clever the way they paid us as students. Our term-time meant that when we worked a whole year we were paid exactly across two financial years, so we were paid exactly the same amount as our tax code across 6 months and thus paid no income tax. That was plenty to rent a studio flat at £35 per week and run a car.
I’m going to apply my maths bit now and get it out the way because it’s important but complicated. It’s how much something increases in price due to inflation. Inflation on average is about 5% in this country, it goes up and down but across any period of time it is 5%. That means £1 next year is £1.05, £1.1025 the next year, £1.158 the next and so on. Across a 10 year period the price of goods should have risen by a factor of approximately 1.6 (or a 60% increase) and theoretically wages should to too so that we don’t start finding everything very expensive. But have they?
Lets have a quick look at those engineering wages. Non-experienced engineers appear to be able to command a £20K starting salary fresh out of university which I make an 18% increase. According to statistics.gov.uk our wages overall were rising at about 3% in 1998 and cycling every 2 years between 3% and 4.5%. Women’s wages have gone up more than men’s but it is still below that 5% inflation. Does that mean we’re getting poorer? Not necessarily because over that period inflation has actually been quite low but we ought to factor in the housing boom as this is what appears to have screwed everything up. 5 years ago a new one bedroom flat in SE London would have set you back about £80K and the prices were rising rapidly. The same flat will now cost you closer to £190K, a whopping 137% increase.
5 years ago Person A is in a position to buy his first place. He earns £25K per year which sees about £1500 in the bank each month. He comfortably bought his own flat with the mortgage repayments coming in at about £530/month so there’s plenty left over for the rest of life like food, saving for a new car, kids in the future, pension etc. Say person B walks in today and buys the flat next door, he does exactly the same job and wages are roughly the same but to live in the same flat as the guy next door he has to find £1250 per month, way over double the mortgage for person A. Suddenly there’s nothing left to put aside for tomorrow, he can’t afford a car when there’s that much going out, he only breaks even every month, can’t afford a pension and kids? Well forget about it, no chance, there is no way he would be able to afford it.
So we have two equal guys doing the same job earning roughly the same amount but one can afford to live comfortably, go on holiday, put plenty away for later and buy a new car every few years while the other has to struggle to get by. You could argue that you need to factor in a second wage today but then you have two people struggling for the same reasons. The couple in no.32 earn the same amount as the couple in no.33 except one is loaded and the other can just about afford to live there.
So what can we do about that? Earn more, that appears to be the way forward but our economy isn’t as straightforward as that. When one earns more one gets taxed more so to actually land noticeably more in the bank one has to earn considerably more. Then to cover that doubled mortgage repayment one would have to be earning nearly double what the guy next door does to be able to lead the same lifestyle.
Say I wanted to live in the same house as my parents did when I was a kid. My dad earned £30K and the house cost £125K in the late 80’s. Mortgage would have set him back about £650 per month which was a lot then but he was earning enough to cover that. When the house was sold a couple of years ago it went for £455K, below market rate but still netting them £300K for just living there. Today the house next door is on the market at £520K and I am roughly the same age now as he was when he bought it. If I were to buy that house today I would have to be able to find nearly £4000 per month to pay the mortgage, they say that you should only spend about 1/3 of your income on rent or mortgage so I would have to be earning over 120K to be able to afford that. It’s clear then that young people will never live the same lifestyle ad their parents did and it is only set to get worse.
Is that the sign of a strong economy? I’m not convinced. But next time the young guy in the office says he has no money at the end of the month just bear that in mind, as he probably didn’t pour it all down his throat in the pub.