The recent surge in interest rates is being linked to the end of the wealth growth in the UK, causing total household wealth to decline by a quarter since the onset of the Covid-19 pandemic.
Experts suggest that the decrease in wealth is attributed to the fall in house prices and pension funds. These factors collectively represent about 80% of total wealth and have played a significant role in boosting wealth across the nation over the four decades leading up to the pandemic.
However, the values of both have declined since the Bank of England initiated interest rate hikes in December 2021. In 2021, total household wealth was worth 840% of the country's Gross Domestic Product (GDP), but this figure dropped to 630% of GDP in the current year.
Falling House Prices and Pension Pots
They stated that "Impacts of the rise in interest rates have put an end to the wealth surge in the UK, causing a considerable drop in total household wealth since the pandemic. "
The increase in interest rates has resulted in elevated mortgage costs, leading to a subdued demand from borrowers. Consequently, sellers have been compelled to lower house prices.
Pension funds are significant holders of government bonds, the prices of which have decreased as investors seek higher returns due to escalating inflation expectations.
Implications for UK Household Wealth
The Bank of England is slated to announce its next interest rate decision this week. While policymakers are expected to maintain the base rate at 5.25%, the likelihood of prolonged high interest rates suggests that the erosion of UK household wealth may persist.
The impact is predicted to be uneven, with variations across age groups and regions. A dip in total wealth generally benefits younger individuals who can purchase homes at reduced prices and secure improved bond returns. However, declining house prices can negatively affect existing homeowners, particularly in more affordable regions like Scotland, Wales, and northern England, potentially placing some households at risk of falling into negative equity.
They also noted that regional disparities are already evident. "The repercussions of this wealth drop have not been distributed uniformly across the country. Less affluent areas like Scotland, Wales, and the north of England have witnessed the most significant wealth declines, while areas with high property prices like the south and east of England have experienced the smallest impact."
The need for a range of reforms aimed at safeguarding households against wealth fluctuations that distribute resources between generations based on luck has become apparent. Achieving fairer and more effective wealth taxation is a critical part of this agenda. In particular, council tax, the UK's largest wealth tax, is viewed as a candidate for reform to enhance fairness and reduce regressiveness.
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