Surging interest rates have driven the biggest fall in household wealth in the post-war era, according to a new report.
The aggregate wealth of British households has dropped by £2.1 billion in cash terms, said the report by Resolution Foundation, an independent think-tank focused on improving living standards for those on low to middle incomes.
In partnership with the arbdn Financial Fairness Trust, it examined the impact of rising interest rates on household wealth, and what a ‘new normal' of higher rates could mean for living standards and wealth accumulation in the future.
The report noted that Britain has experienced an unprecedented wealth boom in recent decades, with total household wealth rising from around 300% of national income in the 1980s, to 840% - or £17.5 trillion - by 2021 but that had fallen to 650% of national income in early 2023.
It highlighted that rising interest rates since late 2021 have caused mortgage rates to rise, house prices to fall and, critically, the price of government and corporate bonds to plummet. Falling bond prices have reduced the measured value of pension assets - normally the biggest single source of household wealth in the country.
If higher rates remain, wealth could fall again to around 550% of GDP, ending the 40-year wealth boom, the report said.
Ian Mulheirn, research associate at the Resolution Foundation, said: "Over the past four decades wealth has soared across Britain, even when wages and incomes have stagnated. But rapid interest-rate rises have ended this boom and brought about the biggest fall in wealth since the war, of £2.1tn."
However, younger people may benefit from tighter monetary policy. On pensions, the Foundation notes that in the pre-pandemic world, a typical worker would need to save around £5,000 a year to achieve an income in retirement worth two-thirds of their income prior to retiring. Under today's higher interest rates, the same worker would need to save around £3,000 to achieve that same standard of living in retirement.
Mulheirn added: "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."
"The future path of interest rates is very uncertain. The current surge could be a blip, or herald a new era for the UK. Either way, policymakers should focus more on whether and how to insulate households from wild swings in their fortunes from these forces well beyond their control."
Mubin Haq, CEO of abrdn Financial Fairness Trust, said: "The short-term pain of higher interest rates for mortgage holders could also mean a longer-term gain for young people hoping to buy their own homes and saving for their pensions. Both become more affordable and allow for a fairer sharing of wealth. In these turbulent times, when assets have tended to held by older generations, we may see rising interest rates reversing the growth in wealth gaps Britain has seen over recent decades."
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