Prior to the COVID-19 pandemic, the global economy spent more than a decade swimming in a sea of easy money thanks to ultralow interest rates. But the tide has turned, and younger generations are encountering a very different financial landscape — one of high inflation, expensive borrowing, and frothy asset prices.
That’s the sobering assessment from Paul Pester, the chairman of Tandem Bank, a U.K.-based online-only bank. In a recent interview, Pester explained how the era of rock-bottom rates artificially inflated asset values while setting the stage for today’s intergenerational clash over wealth accumulation.
“We had essentially zero interest rates since 2008, and what happens when money is free?” Pester asks. “It always leads to asset inflation, and that asset inflation has inflated property prices in the Western world and made those properties unaffordable.”
Interest Rates and Asset Prices
The dynamics are simple: When money is cheap to borrow, people take on more debt to bid up the price of coveted assets like homes and investment properties. This can create a self-reinforcing cycle of higher prices and more debt. But if interest rates rise, the benefits of this asset appreciation accrue disproportionately to those who already own homes, businesses, and other capital — in other words, older generations that got in the market earlier.
“What it really means is a sort of intergenerational mismatch,” Pester says. “I think it could have very deep social issues where, say, parents or grandparents bought a house for £200,000 20 years ago, and because of the free money that’s been sloshing around the system, it’s suddenly worth £1 million. Whereas their children and grandchildren are the people that are going to have to buy it from them, and how are they going to do that?”
Traditionally, low interest rates have been considered a boon for younger would-be homebuyers since they lower the cost of financing a mortgage. But Pester argues that the benefits from cheaper debt in the past decade have been offset by the degree to which higher asset prices, together with the onset of higher rates to combat postpandemic inflation, have put homeownership out of reach for many.
For millennials and Generation Z, the harsh reality has set in that borrowing costs for everything from auto loans to mortgages have spiked. Younger generations who haven’t established credit or invested in assets are entering an economic environment that’s a far cry away from the days of easy money financing for big-ticket purchases.
To make matters worse, says Pester, official inflation metrics in the U.K. may be underestimating the true rise in living costs for many households by excluding major expenses like rents and mortgage payments.
“Rent and mortgage costs were taken out of the calculation of inflation over 20 years ago,” Pester explains. “If you actually include rent [and] mortgage repayments, inflation has really been running away.”
Higher interest rates are a cure for high inflation, but they also act as a further headwind for the younger cohorts hoping to get in on asset appreciation. So while rate hikes help clamp down on rampant price spikes, they can also exacerbate the intergenerational wedge around homeownership and investment portfolios.
A ‘Third Revolution’ in Banking and the Path Forward
There may be no easy solution, but Pester sees a potential path forward enabled by new technologies.
Apps that leverage open banking to provide a fuller picture of users’ income and spending patterns could open the door to more comprehensive credit assessments.
“It enables younger individuals to have potentially much better credit outcomes,” he says.
Options like Pester’s Loop money-sharing app create alternative credit histories by documenting a trail of small loans and repayments among friends and family. This creates a Trust Badge and helps users establish credit over time with smaller transactions, which can lead to a better credit score and better borrowing rates from traditional lenders. Digitally native Gen Zers and millennials have embraced Loop as a way to establish creditworthiness at an early age.
Pester got the idea for Loop by chatting with his niece on WhatsApp and realising that sharing money among friends and family should be as easy as communicating on a messaging app. Loop allows users to create groups and analyses the bank balances of all members. It then dynamically redistributes funds to ensure no member faces shortfalls that could lead to overdraft fees or payday loans.
“Loop is a data layer that sits between the customers and the banks, and it has intelligence built in to optimise money flows between a family or group,” Pester explains.
The app has found particular appeal with younger consumers who are accustomed to mobile, digital financial services and value community collaboration. “It was the top-rated finance app on TikTok in the U.K. in 2022,” Pester notes.
Pester sees Loop as part of a new wave of fintech apps and digital banking that are leading a “third revolution” in finance, one just as, if not more, impactful as the onset of online banking and the explosion of easy-to-use mobile interfaces. He explains that generative artificial intelligence and data analysis could lead to new fintech business models focused on efficiently serving customers who may otherwise have been underbanked. The U.K.’s embrace of open banking has created an ecosystem for fintechs to leverage data access and address unmet financial needs, while AI advancements could open up possibilities for financial advisory services tailored to meet personalised preferences.
“If you speak to someone who’s got £10 million or a £100 million to their name, they will have the likes of one of the big banks who will be managing this for them. They’ll be using their investment portfolio to raise money,” says Pester. “These new technologies could lead to the advent of smarter real-time money managers for the person in the street. It’s what the very wealthy customers have had all of their life.”
