In recent decades, the United Kingdom has witnessed a significant disparity between income and wealth growth, casting a shadow of financial uncertainty over the younger generation. This troubling trend has largely been attributed to the astronomical rise in house prices, leaving millennials and younger individuals struggling to ascend the property ladder by their thirties, in stark contrast to their parents. The consequences of this wealth gap are substantial, as it has the potential to curtail the future social mobility of the country’s youth.
While income inequality has steadily evolved over the last 60 years, it was the 1980s that saw the most significant shift. In the subsequent three decades, income inequality remained relatively stable. However, wealth, particularly property values, has experienced consistent growth, benefiting property owners of all walks of life. This has not led to a drastic alteration in the relative distribution of wealth between the rich and the poor.
Recent revelations from the Institute for Fiscal Studies Deaton Review of Inequality have exposed a critical transformation in the UK’s economic landscape—the burgeoning importance of wealth relative to income. This shift has had profound consequences, significantly tilting the economic power balance between generations.
The staggering rise in house prices since 1995, from £56,000 to over £290,000 by August 2022, has far outstripped general inflation rates. Other assets, such as equities, have also seen an uptick, partly due to a prolonged period of historically low interest rates over the past decade. With approximately 65% of UK households owning property, a substantial portion of the population has amassed considerable wealth.
Conversely, a substantial minority—those without property or other assets—finds themselves with little to no wealth. This demographic has gained nothing from the ongoing wealth accumulation. Consequently, while the proportion of wealth held by the affluent has remained relatively unchanged, the chasm between the haves and the have-nots has expanded significantly.
As wealth has ascended to unprecedented heights, earnings from work have stagnated since the 2008 Great Recession. The real earnings of the average worker have remained static during this period, implying that their nominal earnings have failed to outpace inflation. Household disposable income has also grown sluggishly, making it difficult for individuals to accumulate wealth through earnings and savings.
The gap between the middle and the upper echelons of wealth widened from representing ten years’ worth of earnings to nearly sixteen years in the decade following the 2008 recession, creating substantial barriers to upward mobility. Even before this, earnings lagged behind house price growth. Since the mid-1990s, inflation-adjusted average earnings grew by a meager 37%, while average house prices ballooned by an astonishing 188%, nearly tripling in value.
This monumental disparity has rendered saving for a deposit and qualifying for a mortgage an arduous task for the younger generation, unrelated to any clichéd notions about avocado toast consumption. Whereas over 60% of those born in the 1950s and 1960s were homeowners by age 30, only 36% of those born in the 1980s can claim the same feat.
The interplay between burgeoning wealth and stagnant, unequal incomes has yielded a grim reality—older generations now control larger slices of wealth, imperilling the historical trend of each generation achieving greater financial prosperity than the last. Younger cohorts are increasingly reliant on inherited wealth rather than being able to climb the wealth ladder through their own earnings. This disadvantages those whose forebears possess minimal wealth and poses a substantial threat to social mobility.
Addressing these disparities in income and wealth has emerged as a pivotal point of contention in British politics, both within and across political parties. As these inequalities become more deeply entrenched and start to erode social mobility, they are likely to become a growing source of concern for the populace.
The economic landscape appears increasingly uncertain, and without fundamental enhancements in productivity to facilitate higher earnings growth and an expansion of the housing supply, the recent trends of escalating wealth inequality and stagnant incomes show no signs of abating. The imperative for action to rectify this situation has never been more apparent, for the future financial well-being of the UK’s younger generations hangs in the balance.