Monday, October 7, 2024
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Home » Interest Rate Rises Caused Sharp Drop in UK Household Wealth, Report Finds

Interest Rate Rises Caused Sharp Drop in UK Household Wealth, Report Finds

by Theo Atkinson
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Resolution Foundation says higher interest rates have led to a fall in house prices and pension pots

The recent rise in interest rates has been blamed for ending Britain’s wealth boom and causing total household wealth to plunge by a quarter since the Covid-19 pandemic.

A report by the Resolution Foundation, a thinktank, and Financial Fairness Trust – an independent charity historically funded by Standard Life now known as abrdn – said the fall was due to a drop in house prices and pension pots, which account for about £4 out of every £5 of total wealth, and played a leading role in rising wealth across the country over the 40 years leading up to the pandemic.

However, both have fallen in value since the Bank of England started raising interest rates in December 2021. While total household wealth was worth 840% of gross domestic product (GDP) in 2021, it had tumbled to 630% of GDP this year.

“Interest-rate rises have ended Britain’s wealth boom and caused total household wealth to plummet since the pandemic,” said Ian Mulheirn, a research associate at the Resolution Foundation.

Higher rates have increased the cost of mortgages, resulting in subdued demand from borrowers, which has in turn forced sellers to lower house prices.

Pension funds are large holders of government bonds, the prices of which have fallen as investors demand a higher rate of return due to rising inflation expectations.

The Bank of England is due to announce its next interest rate decision on Thursday. While policymakers are most likely to hold the base rate at 5.25%, the prospect of higher-for-longer interest rates suggests Britain’s household wealth could continue to erode.

Resolution Foundation explained that the impact was likely to be uneven, and would vary across ages and regions. For example, a fall in total wealth tends to be good news for younger people who are able buy homes at a cheaper price, and who will get a better rate of return on bonds bought today rather than a few years ago.

But falling house prices could be bad news for people who already own a home in cheaper areas such as Scotland, Wales and the north of England, given that it could more quickly put some households at risk of falling into negative equity – where the property is worth less than the remaining value of the mortgage.

Mulheirn said regional disparities were already apparent. “The impact of this fall has not been spread evenly across the country, with less-wealthy areas like Scotland, Wales and the north of England seeing the biggest wealth falls, and high-house-price areas like the south and east of England the lowest.

“While the situation may change in the future, these regional disparities again highlight the need for a range of reforms to insulate households against wealth volatility that transfers resources between generations based on luck. Fairer and more effective taxation of wealth is a critical part of that agenda, with Britain’s biggest wealth tax – council tax – in particular need of reform to make it more fairly targeted and less regressive”, he added.

Source : The Guardian

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