In the late 2010s and early 2020s, rock-bottom interest rates fuelled soaring asset prices. But that rise in asset prices may have exacerbated wealth divides between older and younger generations. Generation Z and millennials struggle to afford homes in an environment in which interest rates and inflation have risen and remain high. Higher interest rates might fight inflation, but they also make purchasing a home, car, or other assets financed with debt much more expensive.

“We had essentially zero interest rates since 2008, and what happens when money is free?” says Paul Pester, the chairman of Tandem Bank. “It always leads to asset inflation and that asset inflation has inflated property prices in the Western world and made those properties unaffordable. What it really means is a sort of intergenerational mismatch.”

“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 slotted around the system it’s suddenly worth a million,” he continues. “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?”

How Did We Get Here?

Normally, low interest rates are seen as a boost for consumers, making it cheaper to borrow money for big-ticket purchases like homes and cars. And for a time, that dynamic played out, with easy money fuelling increasing demand for asset purchases and driving up values as a result. But as Pester explains, the same policies that made it easier for some to buy homes in the past may now price out huge swaths of would-be younger homeowners.

“Asset inflation only really benefits those that already own the assets. And since that’s split across society, with a large portion of the assets owned by older generations, you could argue that lower interest rates can lead to a fracturing in society between younger and older generations,” Pester says.

While low rates allowed older generations to rapidly accumulate housing wealth, they’ve left younger cohorts struggling to achieve similar levels of homeownership and asset ownership. And with central banks aggressively hiking rates to tame runaway inflation in recent years, that wealth gap is at risk of widening further.

Factoring Rent and Mortgages Into Inflation

Rents and mortgage costs were once part of inflation metrics but since 2003 have been excluded in the U.K., leading to a potentially misleadingly low inflation rate, says Paul Pester.

Even as signs of disinflation are beginning to emerge, these are directly connected to higher interest rates, which are precisely what make borrowing to purchase assets like homes and cars so expensive in the first place. If these costs were included, the inflation picture would likely appear more daunting and reflective of the economic pressures facing younger individuals and households trying to invest in assets for financial security.

“Rent and mortgage costs were taken out of the calculation of inflation a long time ago, and if you actually include rent for their mortgage repayments, inflation has really been running away,” says Pester.

With policymakers maintaining higher interest rates to combat that higher inflation, a new era of higher borrowing costs could be here to stay.

“Personally, I think higher interest rates are here for some time,” Pester says. “I think we’re going to go back to a more normal interest rate environment of 2% to 3% to 4% over the long term.”

Fintech and Options for Younger Borrowers

While higher interest rates pose challenges for younger would-be homebuyers, Pester sees potential in financial technology to create new pathways for building credit and improving access to assets.

He explains that a key enabler could be open banking, which allows fintechs to securely access users’ financial data with consent. This opens the door to more comprehensive credit assessments beyond traditional metrics that have disadvantaged younger generations with limited credit histories.

“I think technology can certainly be helpful in giving access to debt in a sensible, balanced, careful way to individuals who may otherwise struggle,” says Pester.

“We use open banking to pull every piece of data on a customer, but we also do telephone interviews with our customers to really understand their circumstances and try to pick up those customers that the banks will just push to one side because the computer says ‘no.’ I think access to larger amounts of data can really enable younger individuals to have potentially much better credit outcomes.”

This mindset was the inspiration for Loop, a money-sharing app Paul Pester founded in 2021. The app caught on quickly with Gen Z and millennials comfortable with mobile finance, becoming the top-rated finance app on TikTok in the U.K. in 2022. Loop enables short-term money sharing between friends and family, and by tracking repayments on these microloans, it generates an alternative credit report dubbed a “Trust Badge.”

Users can show years of evidence borrowing small amounts and repaying reliably. That’s valuable data banks lack on younger customers and can lead to informed lending decisions with better rates.

Building credit histories early is crucial, as robust credit unlocks access to essential financial products like mortgages with better terms. At the same time, millennials and Gen Z face hurdles like income volatility and a lack of savings that make traditional credit-building risky.

Younger generations may be reluctant to take on major debt, but fintechs offer ways to establish credit responsibility through smaller commitments without massive liabilities. And, as Pester notes, Gen Z and millennials who have grown up in a period of economic uncertainty are showing a keen interest in taking control of their finances.

“The trend I’ve seen, which has surprised me, is a higher propensity to invest in younger customers,” Pester says. “They have more interest in investment products, more interest in equities, more interest in finding a way, even taking very small amounts of money to build investments in funds and the like. That’s something that has been missing over the last 20 or 30 years.”