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Interest rate rises caused sharp drop in UK household wealth

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 will 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 can 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.

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