Interest rate rises drive biggest postwar decline in UK household wealth

Surging interest rates have driven the biggest fall in British households’ aggregate wealth in the postwar era when measured as a share of national income, according to a new report.

The aggregate wealth of British households has dropped by £2.1 trillion in cash terms, the report by the Resolution Foundation think tank estimated — but it concluded that tighter monetary policy could produce winners among younger people.

UK household wealth comprised 650 per cent of national income in early 2023, down by nearly 200 percentage points since early 2021, noted the report.

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Ian Mulheirn, research associate at the Resolution Foundation, said over the past four decades wealth had soared across Britain “but rapid interest rate rises have ended this boom and brought about the biggest fall in wealth since the war”.

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This is largely the result of a decline in asset values, including house prices, and the value of government and corporate bonds. Falling bond prices have reduced the value of pensions, normally the biggest single source of household wealth in Britain.

If interest rates remain high, they could drive further falls in households’ wealth to about 550 per cent of gross domestic product, the Resolution Foundation estimated.

Financial markets expect Bank of England rates to be at 5.5 per cent by mid-2025.

The report, published on Monday and carried out in partnership with the abrdn Financial Fairness Trust, a charitable trust, found that households’ wealth soared from about 300 per cent of GDP in the 1980s to 840 per cent — or £17.5 trillion — by 2021.

This boom has been a driver of intergenerational inequality as surging house prices and pension values largely benefited older people at the expense of their younger counterparts, many of whom have been locked out of home ownership.

Mubin Haq, chief executive of abrdn Financial Fairness Trust, said: “In these turbulent times, when assets have tended to be held by older generations, we may see rising interest rates reversing the growth in wealth gaps Britain has seen over recent decades.”

Rising rates are unleashing a financial crunch for many families with mortgages. The Resolution Foundation estimated that 1.7 million households will next year see their annual payments to lenders increase by more than £3,000 on average.

What about pensions?

But tighter monetary policy could reduce the house price-to-earnings ratio from its 2022 peak of 8.9 to 5.6, a level not seen since the millennium.

If this happens over the next five years, it would mean house price falls of about 25 per cent in cash terms — a benefit to young people wanting to buy.

Higher interest rates would also increase rates of return on pension savings.

At current interest rates, a typical worker would need to save about £3,000 each year to achieve an income in retirement worth two-thirds of their annual earnings, compared with £5,000 before the Covid-19 pandemic, the Resolution Foundation said.

This would make it easier for young people to save to enjoy decent living standards in old age.

Mr Mulheirn said there were “winners from a shift to a world of higher rates and lower wealth”.

“Higher returns will make it far easier for younger people to save for a pension that delivers a decent standard of living in retirement, while lower house prices will make it easier for younger generations to get on the property ladder and others looking to trade up,” he said. — Copyright The Financial Times Limited 2023