Household wealth across the UK has fallen by £2.1trn over the past year as a result of rising interest rates, a new report from the Resolution Foundation has found.

According to the think tank’s analysis, this cash fall as a share of GDP is the largest fall since World War Two.

As part of a partnership with the abrdn Financial Fairness Trust, the new report has examined the impact of rising interest rates on household wealth, and what a “new normal” of higher rates could mean for UK living standards and wealth accumulation in the future.

The UK has experienced an unprecedented wealth boom in recent decades, with the Foundation highlighting that total household wealth has risen from around 300% of national income in the 1980s, to 840% – or £17.5trn – by 2021.

However, the rapid rate-rising cycle enforced by the Bank of England (BoE) since December 2021 – which has seen interest rates climb from a historic low of 0.1% to 5% – has caused mortgage rates to rise, house prices to fall and the price of Government and corporate bonds to plummet.

The think tank’s estimates suggest total household wealth has fallen to 650% of national income in early 2023, a cash fall worth £2.1trn over the past year, and the biggest fall as a share of GDP since the Second World War.

Research associate at the Resolution Foundation, Ian Mulheirn, 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 £2.1trn.

“Those with significant mortgages will be hit by these major changes. 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.”

If higher rates remain, and markets currently expect the BoE base rates to still be at 5.5% in mid-2025, the report has also indicated it could drive further falls in wealth to around 550% of GDP.

The Foundation suggested this would end the 40-year wealth boom that has been a key driver of intergenerational inequality – with surging house prices and pension values largely benefiting older generations at the expense of young people, many of whom have been locked out of homeownership altogether.

“The future path of interest rates is very uncertain,” Mulheirn continued. “The current surge could be a blip, or herald a new era for the UK. Either way, policymakers should focus more on whether and how to insulate households from wild swings in their fortunes from these forces well beyond their control.”

CEO of abrdn Financial Fairness Trust, Mubin Haq, added: “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.”

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