The recent rise in inflation, as reported by the Office for National Statistics, shows the Consumer Prices Index (CPI) climbing from 1.7% in September to 2.3% in October. While this might not sound like much, its effect on the property market can be bigger than you think.
A Complicated Connection
Inflation and house prices don’t share a direct link. CPI measures the cost of goods and services in the economy, including rent, but it excludes house prices and mortgage payments. However, changes in inflation do influence the housing market in indirect ways.
How Inflation Shapes Buyer Behaviour
When inflation increases, the cost of living rises, leaving people with less money to spend. This can discourage potential buyers from moving or push them to make lower offers, which may drive house prices down. The opposite is true when inflation falls; lower inflation often means households have more disposable income, boosting demand for homes and potentially driving prices up.
The Role of Interest Rates
Inflation also plays a significant role in determining interest rates. The Bank of England (BoE) adjusts interest rates to control inflation, aiming to keep it close to 2%. When inflation rises, the BoE typically raises the bank rate, making mortgages more expensive. Higher mortgage costs can slow the property market by limiting how much buyers can afford.
On the flip side, when inflation decreases, the BoE may cut rates, making mortgages cheaper and encouraging more activity in the housing market. These fluctuations create a balancing act between inflation, interest rates, and house prices.
Rising Rents
For renters and landlords, the story is more straightforward. Inflation usually leads to higher rents, which benefits landlords by improving their rental yields. However, for tenants, this adds to the financial strain, especially during periods of high inflation.
Property: A Long-Term Investment
Despite these short-term effects, property has historically been a reliable investment. A 2020 analysis by Avison Young found that over most five-year periods since 1985, property returns have outpaced inflation. This makes property a valuable hedge against rising prices, whether you’re a homeowner, landlord, or investor.
What Does This Mean for You?
While inflation creates challenges, it doesn’t mean opportunities vanish. A competitively priced, well-presented property will always attract buyers. Whether you’re planning to sell or looking to invest, getting professional advice can help you navigate these market changes and make the right decisions.
We’re here for you! Call our team on 0207 052 1652 to find out what we can offer in terms of property financing.