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0:04 AM, 18th July 2023, About 10 months ago
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Rising interest rates threaten to slash the value of homes by up to 25% in the biggest drop in wealth seen since WW2, one think tank warns.
A new report by the Resolution Foundation and the abrdn Financial Fairness Trust found that higher borrowing costs have already wiped out £2.1 trillion of household wealth in just one year.
The report says that higher interest rates will hit homeowners hard, as mortgage payments will rise and house prices will fall.
It estimates that house prices could drop by 25% in cash terms over five years, bringing the average house price to income ratio down from 8.9 to 5.6, a level not seen since 2000.
Ian Mulheirn is a research associate at the Resolution Foundation, and he 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 £2.1 trillion.
“Those with significant mortgages will be hit by these major changes.”
He added: “But there are winners too 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.”
While the drop in house prices might be good news for those struggling to get on the property ladder, they will also face lower prices and higher returns on their pension savings.
But it could also mean a huge loss of wealth for older generations who have benefited from the housing boom.
The report – entitled Peaked Interest? – makes clear that the country’s ‘unprecedented’ wealth boom is coming to an end.
It also warns that higher interest rates will trigger a sell-off in government and corporate bonds, which are widely held by pension funds and insurance companies.
This could reduce the value of pension pots and annuities, affecting millions of retirees.
Mr Mulheirn said: “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, policy makers should focus more on whether and how to insulate households from wild swings in their fortunes from these forces well beyond their control.”
The chief executive of abrdn Financial Fairness Trust, Mubin Haq, 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.”
The report comes as new data from Rightmove shows that asking prices for homes in the south east have fallen by £5,000 in a month, while nationwide prices have dipped by £900.
The data suggests that buyers are becoming more cautious as interest rates rise and economic uncertainty grows.
The Bank of England has raised its Base Rate to 5% the highest level since 2008, to curb inflation and cool down the economy.
The report says that if interest rates stay high or rise further, Britain’s wealth boom could come to an abrupt end, with serious consequences for households and the economy.
