During the late 2010s and early 2020s, historically low interest rates drove up asset prices, contributing to a significant increase in wealth inequality between older and younger generations. Generation Z and millennials are finding it increasingly challenging to afford homes as interest rates and inflation rise and remain high. The higher interest rates not only combat inflation but also make it more expensive to purchase assets like homes and cars through debt financing.
Paul Pester, the chairman of Tandem Bank, highlights how the prolonged period of near-zero interest rates since 2008 has led to asset inflation, particularly in property prices. This inflation has made homeownership unattainable for many younger individuals, creating a generational wealth gap.
Understanding the Evolution
Traditionally, low interest rates are seen as beneficial for consumers, making it more affordable to borrow for significant purchases such as homes and vehicles. However, the ease of borrowing has fueled demand for assets, leading to inflated prices that now pose barriers for younger individuals aspiring to become homeowners.
Pester emphasizes that asset inflation predominantly benefits current asset owners, primarily older generations, further widening the societal gap between the young and old.
Incorporating Rent and Mortgage Costs into Inflation Calculations
Excluding rent and mortgage expenses from inflation computations in the U.K. since 2003 has resulted in a potentially understated inflation rate. Including these costs would provide a more accurate representation of the economic challenges faced by younger generations.
With central banks introducing higher interest rates to curb inflation, the cost of borrowing for asset purchases has surged, amplifying the wealth disparity between generations.
Empowering Young Borrowers through Fintech Solutions
While rising interest rates present obstacles for young homebuyers, financial technology offers opportunities to enhance credit accessibility and asset ownership for this demographic.
Pester advocates for leveraging open banking to conduct comprehensive credit assessments based on a broader range of financial data, enabling fairer lending practices for individuals with limited credit histories.
Loop, a money-sharing app founded by Pester in 2021, caters to Gen Z and millennials by facilitating short-term financial transactions and creating alternative credit reports that reflect borrowing and repayment behaviors, enhancing creditworthiness.
Establishing credit early is vital for accessing essential financial products like mortgages on favorable terms, especially amid income volatility and limited savings among younger individuals. Fintech solutions offer pathways for building credit responsibly through manageable commitments, aligning with the increasing interest in financial empowerment exhibited by younger generations.
Pester notes the growing inclination of Gen Z and millennials towards investment products and building financial stability, signifying a shift towards taking control of their financial futures.
