How does inflation affect house prices?

Simon Misiewicz

Expat & Property Tax Specialist

6th July 2022

How does inflation affect house prices?

How does inflation affect house prices?

UK landlords need to be aware of the impact of rising interest rates and inflation on property prices.

What are the basics of how inflation affects house prices?

Inflation is defined as an increase in the price of goods and services in an economy over a period of time.

House prices can be driven up by inflation and lead to many potential buyers and investors being priced out of buying a property.

The inflation rate can impact the cost of house prices, causing them to rise or fall.

At the time of writing, UK inflation had risen again at the end of June 2022. This is the highest rate in 40 years, according to the Office for National Statistics (ONS).

How does rising inflation affect UK house buyers?

The end of the Covid-19 global pandemic and Russia’s invasion of Ukraine jeopardised energy and food supplies, causing prices to rise.

The rising inflation rate doesn’t equate to a single answer regarding how UK house buyers will be affected.

It largely depends on the type of mortgage a buyer or property investor wants.

The Bank of England’s base rate changes will affect those looking at a variable-rate mortgage.

Existing fixed-rate mortgages would not feel the effects of base rate changes until they are moved to the lender’s standard variable rate (SVR).

How will high inflation impact rent prices for landlords?

Rent prices may go up or down for landlords but this may be temporary.

The underlying reasons for rising inflation tend not to last.

The energy price hikes, for example, are likely to be temporary. There is a significant but short-term impact.

Looking at the longer-term picture is an important strategy for landlords regarding property investment and rent prices.

How has the UK housing market been affected by high inflation?

A recent survey by Rightmove highlighted an impressive annual 9.5% increase in asking prices for houses in February. The highest level since 2014.

Valuation requests were up by 11% in 2021, with an 11% increase in new properties in the UK market.

Demand remained strong, and supply has not been dented despite concerns over the cost of living crisis during 2022.

The market is still buoyant in 2022, and house prices are expected to stabilise at 5%, which is realistic after the 2021 example of 10% over the asking price.

Although inflation is high and the cost of living is a problem, rent prices will increase as demand increases for rental properties.

UK landlords may be faced with increasing rents due to rising costs such as repairs and maintenance.

Some property investors may keep rental levels the same during the current inflation increases.

What does rising inflation mean for UK property investors?

The UK has had historically low-interest rates since 2009.

The property market has responded to those rates, and house prices have increased significantly.

The current high inflation rates have resulted from supply problems because short-term shortages increase prices and limit availability.

The Bank of England’s primary tool to slow inflation is increasing interest rates.

Higher interest rates could reverse the increases in UK house prices over the last few years.

Higher interest rates could also impact the affordability of property in the UK.

Investing in property is often seen as a protection against inflation.

On average, rental prices have increased annually by 2.3% across the UK.

Landlords expect to increase their rents over time in an inflationary environment slowly.

In a market with strong demand, these rent rises should exceed expense increases for UK landlords.

Is property still a good investment despite rising interest rates?

Rising rates are sometimes considered to be a negative for property investors.

When the Bank of England raises rates, mortgage rates soon follow, increasing the cost of borrowing.

Landlords operating on variable term mortgages will see their monthly rates rising.

Property investors taking out new mortgages will struggle to achieve the same rates they might have obtained six months ago.

Investors may see their rental returns squeezed by rising interest rates.

Although the rising rates, the property market remains a solid long-term investment.

While short-term rental yields may be squeezed, the property market’s return will remain higher than investing in other income-producing assets.

Inflation often drives further house price growth and reductions in loan-to-value over the long term.

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