How does inflation impact buyers, sellers & property owners?
Given the current economic climate and the impact of rising interest rates, high inflation, and the significant increase in the cost of living, households and investors across the UK have, not surprisingly, expressed concern about the future of their finances.
The Bank of England raised interest rates by 50 basis points at the start of August 2022, taking it to 1.75% – the biggest increase for almost 30 years. Subsequently, those with mortgages, loans or credit cards may be faced with high repayments that could, potentially, jeopardise their financial status.
Furthermore, inflation continues to accelerate at an unprecedented rate.
According to the Office for National Statistics, “The Consumer Prices Index including owner occupiers’ housing costs (CPIH) rose by 8.2% in the 12 months to June 2022, up from 7.9% in May.”
This pushes up the cost of living, forcing consumers to pay more to fill up at the petrol station, purchase groceries, and pay their utility bills and property taxes whilst also having a significant impact upon the property market as a whole.
As bleak as the financial forecast may appear at first sight, these combined factors may not be as catastrophic as they appear.
Although interest rates are indeed rising, they are still comparatively low compared to what we have experienced before. Those of us with long enough memories will remember when interest rates were soaring to eye-watering levels.
For comparison’s sake, in October 1989, the UK interest rate hovered at an astonishing 14.88% and slowly reduced to around 7.5% in June 1998. However, over the past two decades, we’ve become accustomed to figures as low as 0.1% (March 2020). Therefore, the current increase to 1.75% certainly isn’t as drastic as we might think.
*Figures: The Bank of England.
Although none of us welcome a rise in interest rates being passed down to our mortgage payments, some perspective and understanding of the bigger picture helps to keep them in context.
The latest increase in interest rates is, in fact, a bid to slow the acceleration of the cost of living, encourage both borrowing and saving, and hopefully help stabilise the economy in a very volatile world. Only time will tell if the Bank of England has made the right move, at the right time.
In this article, I will explain how the current high rate of inflation and increase in interest rates could potentially affect buying and selling a property, land development, mortgage repayments and the state of the housing market as a whole.
Whilst it is hard to find many positives in the current situation, I will give our view on what might happen over the next few months.
For sellers, there’s clearly a lot to think about at the moment. Affordability of a new home, running costs and mortgage payments to name just a few. That said, buyer demand is still currently high in the UK and especially in ‘destination’ locations such as Bath and Bradford-on-Avon, so there’s still a good chance you will find a very willing buyer for your property.
In the current climate, buyer demand may drop slightly while people sit back to see what happens with the economy but once that desire to move has been initiated, it’s hard to hold back.
Sellers are still in a strong position. Buyers will potentially make good gains on the sale of their property, and this will be offset against the purchase of their new property. Those who sit back and wait might miss the opportunity that the current market affords them.
For buy-to-let owners, knowing the best time to sell or hold is a perennial problem. In a high inflation environment, it is best to own assets that inflate with inflation and property is certainly one of those. Higher rental yields can be gained as well. Of course, maintenance and mortgage payments go up as well so it’s a balancing game that many property investors are accustomed to.
Selling your buy-to-let now depends entirely on your personal circumstances. Holding and continuing to rent out is probably the safer bet but there will always be opportunities to sell at a good price. The demand for buy-to-let is certainly still there.
Existing property owners
If you’re an existing property owner, you could see an increase in your mortgage payments, unless you opted for a fixed-rate mortgage. For those on variable rates, now is an excellent time to revisit your mortgage deals and see whether you could switch to a short-term fixed-rate deal that can help reduce your repayments until the market conditions change. There are still some good deals available so now is the time to act.
Mortgages are for the long-term, so we need to be mindful of that. Despite the current situation, the affordability of mortgages is unlikely to be affected over the long term and investing in property is still a financially-astute option because it usually increases in value over time.
Rental yields are likely to increase as well, making it an excellent time to buy property to rent.
During times of rising inflation, it will cost more to buy the materials and labour needed for constructing new properties and land development.
However, developers don’t always pass these increases down and are likely to look for lower margins to attract buyers in the short term.
The potential knock-on effect of this is we might see land prices start to fall with developers acquiring cheaper land to absorb their costs. This would keep the price of new builds relatively stable for first-time buyers.
House prices have been on the increase in the UK for a long time so, counter-intuitively, the hike in inflation and interest rates might stabilise the market and lower the rate of the price increases.
This is because buyers often choose to delay their purchases in times of uncertainty, waiting for interest rates to fall again and house prices to drop.
Over recent years, the UK has faced a property supply and demand issue, especially during the COVID lockdown periods. At the time, this increased property prices, but they could now potentially reduce as the interest rates increase.
It’s important to note, however, that it could be more difficult to get a mortgage during this time. Many lenders may be forced to reduce the income/affordability multiples which means lower lending rates.
Despite the sensationalism and hyperbole of the media, the high increase in interest rates and inflation should not impact whether you should buy or sell a property this year. We’ve seen larger increases in the past and, with the intervention of the Bank of England, the state of the economy should hopefully start to stabilise.
There is no doubt that this is a rocky time for the economy and the housing market in general but at Cobb Farr we remain upbeat. We are still seeing strong demand for property in the Bath and Bradford-on-Avon areas, and there is still the appetite for buyers who want to upgrade and live in such a desirable location.
The same is true for investors. We have seen a strong interest in modern apartments and there is always a consistent supply of property developers looking to revamp period properties that may have fallen into a state of disrepair and where there are significant opportunities to make a good profit.
Confidence in the market is always a tricky balance. Bath and Bradford-on-Avon’s statuses as prime locations have always protected them from the volatility that can hit other parts of the country, but we shouldn’t be complacent about that. There is still more demand than supply in our part of the world but hopefully, as things start to stabilise, homeowners will begin to feel confident in the market and start listing their properties.
In the meantime, we’re here to help. If you are looking for the right home for your family or are interested in making an investment in the area, we would be very happy to guide you.