Listened to a podcast this week with an economist from the London School of Economics. He brought up this point. He said the cost of living now is high, and he acknowledged a lot of people are feeling pain. But he went on to say that whilst you cannot compare apples and oranges, the cost of living in the late 80s and late 2000s was still higher than the cost of living today when they flatten everything out to perform a comparison. The podcast also went on to discuss mentality differences. In the 80s, people were prepared to make sacrifices to get the house they wanted. Delayed gratification was normal, like saving months for a car/stereo/holiday. Now society wants instant gratification. New cars, the latest technology, holidays, etc. And the expectations are higher. A new car, not a 15-year-old runaround. A holiday in Bali, not Benidorm. Moreover, all are available through various forms of financing that just was not available in the 80s. The combination of multiple loans, leases, subscriptions, payment agreements, etc, has led to many people overstretching themselves.
The economist also raised the normalisation of interest rates. Interest rates fell to historically low levels at the time of the GFC in 2008. That was 15 years ago! So someone in their mid-late 20s in the late 2000s buying their first home is now in their early-to-mid 40s, and all they have ever known is near-zero interest rates. Without wanting to sound patronising they have not had the interest rate rollercoaster that those of us a few years older have. The rollercoaster of seeing mortgage payments rise and fall builds a level of fear and 'headroom' into our monthly budgets to cater for the peaks. Anyone younger than 40 hasn't really experienced this.
Some will lay the blame squarely on the individual. Whilst everyone has to manage their own finances and should keep a budget with a 'what if' planner, I think a lot has to do with all the costs that have crept into 21st-century life. Streaming services, mobile phones, multiple computers, app subscription models, I could go on. You can say to people give them up as they are all discretionary spend, but they are now so ingrained into modern life, that it's hard to do that.
The bottom line is that the cost of living is not higher now than it has been in the past, but the factors making up the cost of living are different too. We're still fortunate to have extraordinarily low unemployment at ~2.9% compared with 7% in 1989. If that changes, things are going to feel very bleak indeed.
