House prices could fall by 25 per cent in biggest hit to UK’s wealth ‘since war’, warns thinktank

House prices could fall by 25 per cent if interest rates keep increasing in a concerning “new normal” for UK homeowners, a leading thinktank has warned. The Resolution Foundation said rising interest rates have caused household wealth to fall by around £2.1 trillion over the past year.

It comes after the Bank of England hiked its base rate from 4.4 percent to 5 per cent last month, with some experts predicting a further spike when the bank’s Monetary Policy Committee meet again in early August. In a new report published on Monday (July 17) the thinktank said there would be winners, mostly among younger generations, and losers if higher interest rates remain.

The Peaked Interest? report, which forms part of a partnership with abrdn Financial Fairness Trust, examines the impact of rising interest rates on household wealth and what a “new normal” of higher rates might look like for living standards. It said the house to price earnings ratio could fall from last year’s peak of 8.9 to 5.6, which would represent a low not seen for around two decades, and could mean house prices fall by about 25 percent over five years in cash terms.

The research notes that the UK has seen an unprecedented wealth boom in recent decades, with total household wealth rising from around 300 percent of national income in the 1980s, to 840 percent (around £17.5tn) by 2021. But the Bank of England’s rate-rising cycle since the end of 2021 has caused mortgage rates to rise, house prices to fall and the price of government and corporate bonds to plummet.

Ian Mulheirn, research associate at the Resolution Foundation, 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 £2.1tn.

“Those with significant mortgageswill 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.

“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, policymakers should focus more on whether and how to insulate households from wild swings in their fortunes from these forces well beyond their control.”

The foundation also warned that millions of people are still not saving enough for retirement and minimum contribution rates into pension schemes need to rise, but by much less than in a low-interest-rate environment. Pre-pandemic, a typical worker would need to save around £5,000 a year to achieve an income in retirement worth two-thirds of their income prior to retiring.

Under today’s higher interest rates, the same worker would need to save around £3,000 to achieve the same standard of living in retirement, making it easier for younger generations to save sufficiently and enjoy a decent standard of living after retiring.

Mubin Haq, chief executive of abrdn Financial Fairness Trust, 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 be held by older generations, we may see rising interest rates reversing the growth in wealth gaps Britain has seen over recent decades.”