Rising interest rates have caused a significant decline in household wealth in the UK, leaving households collectively £2.1 trillion worse off.
Estimates from the Resolution Foundation reveal that household wealth has dropped by almost a quarter since 2021. The total worth of households, which peaked at 840% of the total economy in 2021, has fallen to around 650% in the first quarter of 2023.
In light of the new findings Chairman of Cornerstone Group International, David Hannah comments on how the persistent interest rate rises have affected the UK property market.
The Bank of England’s base rate currently stands at 5% after 13 consecutive rises since late 2021. Some experts estimate that it could rise to 6.25% by the end of this year.
Consequently, mortgage rates have surged, with the rate on a two-year fixed deal reaching 6.66% – a level not seen since August 2008 – causing house asking prices to fall for the second consecutive month according to Righmove. However, the report from Resolution Foundation suggests that persistently higher interest rates causing lower house prices could provide better returns on pension savings, potentially enabling a decent standard of living in retirement.
While rising interest rates are painful for current homeowners, those trying to enter the housing market may benefit from falling house prices. First-time buyers attempting to get on the housing ladder could find it easier as a result. The Resolution Foundation findings have found that wealth in Britain has increased significantly over the past four decades, despite stagnant wages and incomes. However, the rapid increase in interest rates has brought this trend to an end and caused the largest decline in wealth since the war.
Chairman of Cornerstone Group International, David Hannah said, “In recent years, we have witnessed a series of interest rate hikes initiated by the Bank of England. Since late 2021, the base rate has been raised thirteen times, bringing it to the current level of 5%. By Christmas, we may see a further increase to 6.25%. This trajectory has substantial implications for our financial landscape.
“One of the most immediate and noticeable effects of rising interest rates is the surge in mortgage rates. Homeowners and prospective buyers face the challenge of higher borrowing costs, which directly impacts their monthly repayments. It is essential for individuals to carefully assess their financial positions and plan accordingly to navigate this shifting landscape. While this may present difficulties, it is vital to remember that prudent financial management and professional guidance can help us weather these storms.
“Furthermore, rising interest rates have a direct correlation to the value of our properties. House prices have experienced a decline as a result of these rate hikes. While this may pose challenges for current homeowners, it presents a unique opportunity for individuals and families looking to step onto the property ladder. Falling house prices can create more accessible entry points for first-time buyers, enabling them to achieve their dreams of homeownership. We must not lose sight of the potential silver lining amidst the clouds of uncertainty.
“Additionally, it is important to consider the impact of rising interest rates on investment decisions and retirement planning. The value of pensions and the performance of government and corporate bonds are closely tied to these rates. As interest rates rise, the value of these investments may experience a decline. However, it is crucial to approach this situation with a long-term perspective. Persistently higher interest rates can potentially lead to better returns on pension savings, ultimately enhancing our ability to enjoy a comfortable retirement.”