In 1941, George Orwell wrote that, far from resembling the “jewelled isle” of Shakespeare, Britain was more like a “stuffy Victorian family” where the younger people are “thwarted” while “most of the power is in the hands of irresponsible uncles and bedridden aunts”.
If he were writing today, Orwell would be even more scathing. If British society is one giant extended family where one person’s actions directly affect the life of another, it is now a very unfair one where the younger members, even the most well-behaved ones who do exactly as they are told, are repeatedly punished.
But the sanction comes not in the form of a brief telling off, nor being grounded, but courtesy of monetary policy. And millennials – that’s anyone under 40 but older than 25 – have now been at the sharp end of it twice.
After the 2008 global financial crisis, this age group was subjected to stunted wage growth which made it hard to cope with the pressures that adult life usually brings, like having enough money to raise children.
On top of that, historically low interest rates from the Bank of England meant that the cost of buying a home soared above wages (also known as asset price inflation) making it harder for young adults who didn’t have wealthy parents to buy a home than it had been for previous generations. At the same time, older people were more likely to benefit from the very same monetary policy. Those rising house prices made them wealthier and low interest rates made their mortgages cheap.
And now, younger people are experiencing the other, rather sharp, edge of that sword – rising interest rates which could make their mortgages more expensive and, potentially, unaffordable. More expensive mortgages could also mean that young adults between the ages of 30 and 39 who have mortgages see their disposable income fall by as much as 14 per cent, this group is more likely to have bought when prices were high and, therefore, have bigger loans. Those who rent won’t fare much better; they’re being asked to pay historically high sums to their landlords.
Meanwhile, older homeowners are more likely to be insulated from these rising mortgage rates because they are far more likely to own their homes outright than younger people who are still in work and repaying their mortgages.
That’s not all. The money working-age people take home after tax (also known as real wages) is being squeezed by high inflation which is currently at 8.7 per cent and making everything from cucumbers to clothing, from energy bills to travel more expensive.
The Bank of England’s drive to lower that inflation by hiking interest rates could also trigger an economic downturn which will make life harder for working-age people by keeping debt expensive, driving wages down and, potentially, triggering a housing market crash, while pensions for older people are protected so they cannot go down in real terms (the triple lock which Labour have just reiterated their commitment to).
Are you still with me? Because this isn’t the end of the list of financial obstacles younger adults have to contend with. They’re also more likely to have student debt than their older counterparts, which means they’re making loan repayments as well as paying taxes and mortgages or rent.
Young adults who bought homes at the top of the market between 2020 and the end of 2022 are going to be hit hardest by high mortgage rates and a possible fall in the value of their home while, at the same time, contending with higher day-to-day living costs.
But there could yet be an upside to this chaos for those who did not manage to buy homes before the current economic crisis hit.
Over the course of a life, there are two big things that you need to save for: one is buying a home, and the other is having a decent quality of life in retirement.
The low interest rates which took house prices to historic highs after 2008 also meant that older people’s savings didn’t do so well. They, therefore, had to work harder to save for retirement.
Now, as we face higher interest rates and a potential fall in real house prices, the intergenerational inequality which currently feels so sharp, could actually ease off. To get excited about this, you’ll have to be able to zoom out and think long-term.
Earlier this month, former Treasury advisor and economist Ian Mulheirn spoke about how this could work in front of the Treasury Select Committee in the House of Commons.
We caught up afterwards and he explained that “the inflation shock of the pandemic and the interest rate rises since 2022 are having a big impact on intergenerational inequality. It’s bad news for anyone who has bought a home at the top of the market and is now facing a mortgage shock.”
However, “for younger people below the age of 35 who don’t own a house and are at the start of the savings journey for a pension, falling asset prices is good news because the amount they need to buy a house and save for a pension is lower than it was before interest rates started rising.
“Longer term, they will have to save less to secure a decent standard of living in retirement because pension funds are seeing better returns,” he added.
Often, the economic situation in the UK doesn’t seem fair for young people. You do everything right and are still relatively worse off than your parents or grandparents were when they were young, particularly if you gambled on the housing market which made older people so much money in the last decade.
But the silver lining, if calling the fact that some people are going to seriously struggle that is not perverse, is that a fall in house prices and a rise in interest rates could help some people access a quality of life which was previously out of reach for them.
Vicky Spratt is i‘s housing correspondent
