Higher interest rates could be good news for young people, report says

Jul 17, 2023

Consistently high interest rates could benefit young people – lowering house prices and making saving into pensions easier, a thinktank says.

The Resolution Foundation argues that a “new normal” of higher rates could end a 40-year wealth boom that has been a key driver of intergenerational inequality.

Substantial increases in the cost of borrowing can help cool the property market, with more houses going on sale and buyers seeking to borrow less.

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And according to the foundation, it might take less time for first-time buyers to get their feet on the property ladder.

It currently takes about 14 years for young people to save for a 10% deposit – but the thinktank thinks this could fall to 10 years.

Back in the 1990s, it took just eight years to reach this significant milestone.

While rising rates add to the cost of repaying mortgages, the foundation said this could be more than offset by a lower level of borrowing needed to buy a home, reducing the overall lifetime cost of property ownership for new buyers.

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Younger workers may also benefit when it comes to pensions, the report says, as they can put away less and get more in return than previously.

In a low interest rate, pre-pandemic world, a typical worker needed to save roughly £5,000 a year to secure two-thirds of their income prior to retiring.

But now the base rate has increased, just £3,000 a year needs to be saved to achieve the same result.

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Research associate and report author Ian Mulheirn said: “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.

“There are winners too from a shift to a world of higher rates and lower wealth.”

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The report also says household wealth has fallen by £2.1trn over the past year – the biggest decrease as a share of economic growth (GDP) since World War II.

It comes as a key holding of pension funds – bonds (issued by governments to raise money) have fallen in value and reduced the value of pensions.

Interest rates have been consistently hiked in an effort to bring down stubbornly high levels of inflation. Rates are forecast to go above 6% – up from the current 5% – and stay around 5.5% until mid-2025.

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