(Wealth) gap year

Executive summary

The Covid-19 crisis has had profound effects on the UK economy, and understanding that impact is of vital importance for economic policymakers. The labour market and income effects of the crisis were the most immediate, and have been the subject of much attention and analysis to date. But it is also vital for policy makers to understand how the pandemic has affected household wealth – not least because the Covid-19 crisis has had an unprecedented impact on families’ finances. Holdings of wealth matter for living standards directly and the strength of household balance sheets will be a key determinant of how quickly the economy can recover. Indeed, changes in wealth may well be the enduring legacy of this crisis.

Given the importance of these issues and the absence of timely data on holdings of wealth, in our second of a series of comprehensive, annual reports covering the state of wealth in Britain, we combine the results of an original online survey with detailed data on the holdings of wealth to provide the first complete picture of the impact of Covid-19 on the distribution of wealth in the UK.

The good news is that the unique nature of the pandemic has led to higher saving and lower debt in aggregate

The context to the crisis has been four decades of steady increases in the value of wealth. Total wealth equated to roughly three times national income in 1980, and on the eve of the pandemic was closer to seven times income. As the value of wealth has risen, the gap between families’ wealth across the distribution have widened. The gap between wealth for an average household in the top decile and that in the fifth decile increased by 50 per cent (up to around £1.3 million) between 2006-08 and 2016-18.

Strikingly these pre-pandemic trends have continued during the crisis. We estimate that total household wealth has increased by almost £900 billion – an increase of around 6 per cent on pre-pandemic levels. Increasing wealth during a recession is unusual: this is the first UK recession in at least 70 years where this is the case. Two effects have driven that change: first, the direct effects it has had on saving and borrowing behaviour; and second, the indirect effects on the value of household balance sheets through asset price changes. In aggregate, households have increased nominal savings by around £125 billion more than would have been expected absent the pandemic and at the same time, non-credit card consumer debt has fallen by around £10 billion. By contrast, following the financial crisis, savings and cash held by households failed to grow for six years. But these direct effects are dwarfed by the changes coming from indirect changes in asset prices. Here we estimate that up-to-date prices imply that the value of total wealth has increased by over £750 billion.

But not every family has been fortunate

To investigate the scale, distribution and effects of changing saving and debt, we use results from a specially-commissioned online survey of more than 8,000 individuals to provide a timely understanding of the impact of the pandemic. That survey shows that these striking increases in wealth have been very uneven. Indeed, around 30 per cent of families in the bottom 20 per cent of the income distribution actually saw their savings decrease. This is three times higher than the proportion reducing savings for the top 20 per cent of earners. Changes in debt are also skewed: around 10 per cent of low earners reduced debt during the pandemic while over 25 per cent of higher earners did the same.

There are two key forces at play here. First, the forced fall in social consumption spending due to restrictions put in place in response to the pandemic, allowed households to build up savings faster than normal – the household saving ratio hit its highest level since at least the 1960s. Saving tends to rise during recessions as families retrench, but the saving ratio in the aftermath of Covid-19 was more than twice the peak during the financial crisis. And better-off families were, on average, particularly likely to benefit because that group tends to spend a higher proportion on social consumption. At the same time evidence suggests that lower income households, particularly those including children, faced higher living costs during the pandemic.

Second, falls in income for those experiencing a negative labour market outcome. The reduction in economic output during 2020 was the largest calendar-year fall in 300 years. This obviously had a huge knock-on effect on the labour market. But Government support schemes – particularly the Coronavirus Job Retention Scheme – have been successful in largely insulating households from this colossal hit to the economy. But a minority of families still suffered income falls, for example as a result of lower wages under the furlough scheme, falling working hours, ineligibility for support schemes and outright job loss. Over 30 per cent of those who were out of work at some point during the pandemic increased debt since February 2020 (higher than the 20 per cent of people who worked throughout).

Changes in wealth from asset price appreciation depend, not on income or spending, but pre-existing wealth holdings

Such changes in saving and borrowing behaviour for individual families will have material effects on wellbeing and financial resilience. But changes in asset prices have had a larger effect on the overall level and distribution of household wealth – and crucially individual impacts depend on pre-existing wealth holdings rather than what someone earns or spends.

In this context, it is striking that while asset price volatility has been exceptionally high, the recovery in asset prices has been very rapid. Sharp falls in asset prices at the start of the pandemic have largely reversed and, for some assets like UK housing, prices are now substantially above pre-pandemic levels. Increasing asset prices directly raise the level of household wealth. We model the impact of changing asset prices using the ONS’s granular Wealth and Assets Survey (WAS) and find that the pandemic’s effects on asset prices raised wealth levels by as much as 7 per cent in the middle of the wealth distribution. Those in the middle of the distribution had the largest proportional rises because they tend to hold more housing wealth as a share of total wealth than richer or poorer families – and house price increases outpaced returns on other assets. But the largest absolute increases in wealth were for those at the top of the distribution: the richest 10 per cent of families gained, on average, £44,000 in net wealth per adult from higher asset prices.

Changes in household wealth from asset price appreciation have outpaced direct changes from saving and debt

We bring together the effect of rising asset prices and active changes in saving debt to estimate overall changes in wealth during the pandemic. The rise in household wealth, particularly in the middle and top of the distribution, has further widened wealth gaps. While the median family has gained £7,800 in wealth per adult, those at the richest 10 per cent of households have gained a little over £50,000. The poorest 30 per cent of the wealth distribution gained just £86 per adult on average in additional wealth. Therefore, the gap between the richest 10 per cent and the fifth decile of the wealth distribution has increased by over a further £40,000; and by £7,000 between the fifth decile and the poorest 10 per cent. The typical gap in wealth per adult between the top and the middle of the distribution now stands at 55 times typical household income (measured after housing costs). Rising wealth gaps have real effects on the economic experience of families. Holding more wealth in absolute terms confers a range of benefits, for example: accessing higher investment income, facilitating consumption smoothing, achieving greater financial resilience, lowering housing costs for those able to purchase homes and being associated with higher subjective measures of wellbeing.

Evidence from our survey suggests that the enduring legacy of the pandemic is likely to be widening wealth gaps

It seems very likely that much of the increase in total wealth and wealth gaps will last well beyond the pandemic.

The first reason for this is that respondents to our survey tell us that the direct effects of the pandemic are unlikely to go into reverse and may even continue. Future savings will depend on the extent to which households spend additional savings on consumption, as well as whether savings rates remain elevated. Only around 14 per cent of people with increased savings reported they were “very likely” to use additional savings for purchases. More worryingly from the perspective of the recovery, there is some evidence that savings rates may remain elevated for some time. This is typical after recessions as households repair their balance sheets, building up their financial buffers ahead of the next downturn. But the coronavirus crisis seems to have encouraged a shift in preferences beyond additional precautionary saving: 35 per cent of families with increased pandemic saving are likely or very likely to save more each month than they did before the pandemic because of worries about the future; and 43 per cent say they will do so because they believe they have learnt that they do not need to spend as much as before the pandemic. Those with increased debt have low confidence that debt levels will fall in future. Only 9 per cent of people with higher debts are very confident that debt levels will fall due to rising income in the future.

Second, while prospects for asset prices are inherently uncertain, history suggests a full reversion in prices back to pre-pandemic levels is unlikely. Interest rates are expected to remain low for some time, quantitative easing seems unlikely to be reversed in the near future and the increase in demand for residential space due to increasing home working may be a structural shift in the housing market. All of which will contribute to keeping asset prices elevated. Although house prices may fall back given the end of the stamp duty holiday.

Looking ahead, it will be important for policy makers to address changes in the distribution of wealth

This was an unprecedented economic crisis, but wealth continued its 40-year trend upwards. It is imperative the Government takes this into account when designing policy for the post-pandemic world; this is an area where simply treating this as a normal recession makes no sense at all. In this context there are a number of specific policy areas that require urgent consideration. The distribution of debt and savings changes provides extra justification for keeping the pandemic support of an additional £20 per week to UC; those in receipt of UC are low-income and are less likely to increased savings and more likely to have increased debt. More broadly, policies that are aimed at addressing specific aspects of the trends in wealth, for example Help to Buy, which aims to reduce the disadvantage that higher house prices pose for first time buyers, need to recognise the drivers behind changes in wealth. More of the same on the housing market risks continuing to fuel house prices increases and giving government subsidies to the already well-off. Wider policies have generally ignored the trend of rising asset prices, which has only been compounded by the pandemic. Taxes on wealth are the clearest example of this, where tax revenues have stayed stubbornly constant despite more than a doubling in wealth levels. This is ultimately unsustainable – particularly in the face of challenging public finance constraints. These policy challenges will be discussed in more detail in a policy-focussed paper which will follow later in the year.

• Download the full report (in PDF)
• Back to top

The pre-pandemic context for family finances

On the eve of the pandemic, households held more wealth than at any point over the past half a century. Apart from dips in the 1990s and financial crisis recessions, rising wealth values have been a feature of the UK economy since 1980. While wealth inequality, as measured by the share of wealth at the top of the distribution, was high in the UK, it has changed relatively little since the 1980s, after having consistently fallen through most of the 20^th Century. But there are huge absolute wealth gaps between families, and those gaps were increasing prior to the onset of the pandemic. The typical family in the richest 10 per cent of households had £1.3 million more in wealth per adult than the typical family in the fifth decile of the wealth distribution – equating to 54 times typical annual family household income prior to the pandemic.

Moreover, financial resilience – the ability of families to cope with a fall in income – was low for many families. Higher savings prevent families needing to cut consumption when incomes fall. As the UK entered the pandemic, close to half of households had savings valued at less than one month’s income. And low savings were particularly prevalent for those on low-incomes: two thirds of this group had savings less than one month’s income.

Both long-term trends in UK household wealth, rising overall wealth levels and rising gaps between families, have been accelerated by the pandemic. This is highly unusual: no recession in the past 70 years has been accompanied by rising aggregate wealth levels. This was driven by two effects: first, active changes in savings as limits to spending driven by social-distancing restrictions have led to more than £200 billion in accumulated savings and many families paying down debt; and second, indirect impacts of asset price appreciation – for example, house prices have risen by 8 per cent since the start of the pandemic. This report investigates each in turn and, for the first time, provides joint analysis of the impacts across the wealth distribution.

• Download a PDF of Section 1
• Back to top

The effects of the pandemic on the income, saving and borrowing of UK households

The pandemic caused huge disruption to every aspect of life and the economy was no exception. But savings have increased by £200 billion relative to pre-pandemic levels and consumer debt has fallen by around £10 billion. This seemingly contradictory fact reflects the unique nature of this crisis. Reduced social interactions – via government rules and personal choices to reduce health risks – meant workers in jobs reliant on social spending were not able to work. The fall in spending opportunities meant that those able to work from home, and continue earning as normal, accumulated extra savings and/or paid down debt. The aggregate effect is one of improving balance sheets – the first recession where that is the case in at least 70 years.

But focusing on the aggregate improvement in household balance sheets, while very welcome, misses the impact of the crisis on those who were not insulated from falling incomes. Wide-ranging government support schemes, particularly the Coronavirus Job Retention Scheme (JRS), ensured that increases in unemployment were much smaller than they might have been. But those who were furloughed, lost their job or received reduced pay suffered a fall in income. For those families affected, micro-evidence points to reduced saving and increasing use of debt.

The bifurcation in the behaviour of households – typically those better-off keeping jobs, reducing spending and building savings and those worse-off losing income and using savings or debt – will have longer-term impacts on financial resilience and well-being.

• Download a PDF of Section 2
• Back to top

The impact of the pandemic on UK wealth gaps

Our finding that the direct effect of the pandemic has led to increased savings and lower debts – together increasing total net wealth by around £134 billion in aggregate – is far from the whole story. Instead, it is crucial to recognise that much wealth accumulation is passive – resulting from changes in the prices of the assets that families own. In the same way as this recession has seen a surge in savings rather than the usual flatlining, asset prices have also behaved unusually. Following sharp falls at the start of the pandemic they have since increased sharply on the back of optimism about a vaccine-driven recovery and large-scale policy support in many countries. These increases, have for the most part, more than unwound the falls in asset prices seen at the start of the pandemic. Crucially, who benefits from this depends not on what people earn, but on what they already own. The combination of differential changes in asset prices and the composition of family wealth, therefore, together determine the distributional effect of asset price changes. Since UK house prices have risen more strongly than the prices of other assets, families in the middle of the wealth distribution have seen the biggest percentage increase in their wealth as they have a greater proportion of their wealth invested in property. However, the richest households have seen the largest wealth increases in absolute terms, reflecting their larger existing wealth holdings on entering the crisis.

Combining the effects of asset price appreciation with the direct effect on savings and debt, we estimate that total wealth has increased by around £890 billion during the pandemic. The majority of this results from changes in asset prices which have contributed £756 billion to this increase. Asset prices have clearly had a much larger impact on household wealth than the changes in saving and borrowing behaviour discussed in the previous section. Again, the good news should not be lost: for many households there have been considerable increases in wealth that will raise living standards (the typical middle-wealth family has seen wealth rise by £7,800 during the pandemic) and increase their financial resilience. And although these wealth increases have not pushed up relative wealth inequality, those who started the pandemic with little or no financial wealth have not benefited from asset price changes, especially as very little of their wealth is held as property. Put simply, all this means that the crisis has widened wealth gaps, particularly between those at the bottom of the wealth distribution and everybody else.

• Download a PDF of Section 3
• Back to top

Prospects for household wealth in the aftermath of the pandemic

For aggregate household wealth to rise during a recession is unique in recent history, and it has important distributional consequences. Gaps between households have been exacerbated by the pandemic: the gap between average wealth for those in the fifth decile of the distribution and those at the top increased by over £40,000; and the gap between the middle of the distribution and the bottom has increased by more than three times than it did over the previous decade.

While it is key for policy makers to understand the changes in the level and distribution of wealth during the pandemic, it is also important to consider prospects for the future. Whether these gaps persist will depend on what happens to asset prices and how families respond to changes in their wealth. On the former, while there is inevitably significant uncertainty, it seems unlikely that all of the recent rises in prices will reverse (although it is possible that house prices fall in the coming months after the end of the stamp duty holiday, and with the prospect of a rise in unemployment).

Evidence on the behavioural response of families suggests there is significant uncertainty about whether the changes we have seen during the pandemic will unwind. Those households which have increased savings report that they are unlikely to draw them down and may even continue to accumulate savings at a faster rate. This would be consistent with the response to past recessions, and also with the idea that the pandemic has raised fears about future crises. Meanwhile, those households who had to increase debts during the pandemic report that, for the most part at least, they are not expecting to pay down those increased debts in the near term. Taken together, then, the legacy of the pandemic looks set to be a continuation of the pre-pandemic trends: continued growth in overall total wealth with a sizable minority of the population less able to cope with any future income falls.

• Download a PDF of Section 4
• Back to top

Conclusions and policy directions

The pandemic has had profound impacts on household wealth in the UK. Covid-19 has had an unprecedented impact on the economy, but the big picture is that there has been good news on family finances. Uniquely for a recession in at least the past 70 years, the aggregate picture is one of rising wealth levels, increased saving and falling debt. These developments should help to support living standards and will mean that many families will have seen their financial resilience increase.

But these gains have been uneven. Those at the bottom of the distribution are much more likely to have increased debt and have not been in a position to benefit from increases in asset prices. Moreover, although the outlook is uncertain, evidence from our survey suggests that the changes seen over the past 16 months are likely to persist. This means that the legacy of the pandemic looks set to be a continuation of the pre-pandemic trends: continued growth in overall total wealth, but larger absolute gaps between families, with a sizable minority of the population coming out of the pandemic more vulnerable to future income falls.

• Download a PDF of Section 5
• Back to top