2023-07-17 13:41:47
British households are suffering a “record” drop in their wealth due to soaring interest rates. It might nevertheless provide a boost to first-time home buyers, according to a study published on Monday. Soaring interest rates amid inflation since the post-Covid-19 recovery has caused “a fall in household wealth across Britain valued at £2.1 trillion over the past year” , according to this study by the think tank Resolution Foundation.
This organization recalls that Britain has benefited from an “unprecedented wealth boom in recent decades”, while the total wealth of British households has increased “from around 300% of national income in the 1980s to 840% , or 17,500 billion, in 2021”.
Soaring interest rates amid inflation
However, “the rapid interest rate hikes by the Bank of England since the end of 2021 have driven up mortgage rates, caused house prices to fall and the price of UK Treasury bonds and corporate bonds,” explains the Resolution Foundation, which specializes in anti-poverty policies. Falling government bond and bond prices have reduced the book value of pension fund assets, “normally the biggest source of household wealth in Britain”, says the study, conducted in partnership with the Abrn Financial Fairness Trust.
As a result, UK household wealth was now down to just 650% of UK national income at the start of 2023, the biggest percentage drop since the end of World War II, according to the study. Faced with inflation which held steady in May at 8.7% over one year and which persists beyond expectations, the British central bank raised its rates in June for the 13th consecutive time, to 5%, and markets anticipate that they will peak at 6.5% later.
Towards fewer intergenerational inequalities?
This decline in the wealth of British households might attenuate the “intergenerational inequalities” which have increased over the past 40 years, the housing boom having mainly benefited the oldest generations while the youngest have found themselves excluded from access to property.
Persistently high interest rates put pressure on the finances of households that already have a home loan, as they usually come with variable rates, or fixed for only a few years. Conversely, these high rates should lead to a decline in property prices and also allow retirees to obtain a better standard of living by increasing the returns from pension funds, the study concludes.
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