UK families experience the largest decline in household wealth since second world war

Household wealth has dropped by almost a quarter since 2021, a thinktank from the Resolution Foundation has revealed.

Soaring interest rates have left households a combined £2.1tn worse off as property prices and pensions continue to fall in value.

The total worth of households peaked at 840% of the total economy (GDP) in 2021, driven by low interest rates and the related increase this had on asset prices.

The cost-of-living crisis had put an end to the trend of rising wealth with the total worth of households dropping to about 650% in the first quarter of 2023.

This is by far the biggest fall on record.

The thinktank blamed the fall in family’s wealth on the Bank of England’s rapid interest rate rises, which after 13 hikes in a row since late 2021 currently stands at 5 %.

Experts suggest this could rise further to 6.25% by Christmas.

This has caused mortgage rates to rocket, house prices to fall and the price of government and corporate bonds to drop – reducing the overall value of pension pots.

The thinktank went on to reveal that if interest rates remain high for the long-term, household wealth could settle at around ten-times GDP a figure not seen since the second world war.

But there is a positive in all this.

Long term high interest rates would improve housing affordability which will help young and would-be owners. Based on current interest rates, the house-price-to-earnings ratio could fall to around 5.6 – the lowest level since 2000.

Saving for retirement may be easier too. E.g. a 40 year-old on an average salary needed to save around £5,000 a year pre-pandemic – around 16% of their gross income. 

At the current interest rate, they would only need to contribute £3,000 a year – a much lower 9% of their income – to gain the same return.