April 6, 2022
Everyone likes to feel they have something they can depend on, don’t they?
It’s why property investment is so popular – after all, there’s nothing quite as dependable as good old-fashioned bricks and mortar.
We’ve enjoyed some great market conditions, largely thanks to low interest rates. However, with recent events there is a clear expectation that interest rates will rise, and high inflation is looking more than likely.
As an estate agent with over 20 years of experience working with landlords in the property market, I’ve seen first hand the positive impact of low interest rates and the opportunities for sound investment they provide.
But if all that is about to change, what does this mean for landlords and how might high inflation impact rent prices?
Forewarned is forearmed, as the saying goes, so let’s take a look at some current information and see if we can shed some light on the matter.
How will high inflation impact rent prices?
In a recent webinar for Rightmove, David Smith, the highly respected Economics Editor at The Sunday Times had some very useful insights into the current situation and I thought I’d share some salient points here with you.
High inflation may not be here to stay
Now that we have had the Chancellor’s Spring statement it’s clear that inflation is currently on an upward trend.
There has already been an increase to 6.2%, with Rishi Sunak forecasting that the average inflation rate will hit 7.4% this year.
None of this is ideal, but I believe it helps to look at inflation in an historical context.
In the United Kingdom, inflation averaged 2.52 % from 1989 until 2022.
Within that time frame there was an all time high of 8.50% in April of 1991, and a record low of -0.10%
The main reasons for inflation are an increase in the cost of living and low consumer confidence, but according to David Smith, there are clear signs that high inflation is not necessarily here to stay,
Why? Because the underlying reasons for it are themselves temporary. The energy price spikes, for example, tend not to last. Which is not to underestimate their considerable impact, but looking at the longer term picture is crucial here.
This is similarly the case with manufacturer’s supply chain issues which are beginning to ease now, with improved delivery times as a result. We also have stronger employment which is actually higher than pre-pandemic levels.
The Bank of England reducing their Quantitative Easing programme is a sign that, with less money flowing into the economy, we can expect less of the heady house price rises of 2021, and more of a levelling out while still holding steady.
How high can we expect interest rates to go?
The Bank of England is paying close attention to the vulnerability of the economy at present, so is being careful not to impose anything too harsh.
Although the increase to 0.75% is a significant jump from the 0.1% we’ve all enjoyed up to now, the expectation is that there will be a gradual return to 1%, possibly 1.25% this year, and up to, at most, 2% next year.
Clearly, this is what will have the most significant impact on housing, because if you’re wanting to invest in the property market, the last thing you will want to see is a massive interest rate rise. I get that.
But it’s worth paying close attention when experts like David Smith tell us that the economy is almost back to pre-pandemic levels after two years. This is amazing when you consider that previous economic recoveries have taken closer to five years.
It’s news like this that we need to keep us forward-looking, because although there is no denying the unpleasantness of the current situation and its effect, we need to be able to see past this to a time of less uncertainty.
This may feel like a leap of faith under the current circumstances, but we’ve been here before and bounced back, so it’s certainly possible.
While the Russian invasion of Ukraine has the potential to slow the recovery, the (still) relatively low interest rates and a willingness to spend the estimated £175-£200 billion of ‘involuntary savings’ built up during the pandemic could make a real difference here.
With many of us realising how important our homes are for working and living, some of these ‘involuntary savings’ (money not spent on leisure and tourism due to the pandemic and subsequent restrictions) could well be spent on housing instead.
How has the housing market been affected?
A recent survey by Rightmove showed an impressive annual 9.5% increase in asking price in February, which was the highest since 2014. Valuation requests were up 11% on the previous year, and there was a similar 11% increase in new properties to market.
All this tells us that, after the initial rise in value demand due to the pandemic, that demand remains strong and supply hasn’t been dented by concerns over the cost of living crisis.
The healthy momentum we saw in house prices therefore looks set to continue, and while we can’t realistically expect the 2021 examples of 10% over the asking price, the market is still buoyant and house prices are expected to stabilise at about 5%.
Advice from the property pros
I do realise that it’s quite a lot to take in, but it’s worth the time it takes to digest the figures and see how they stack up with your situation.
My takeaway from the facts and figures I have read, is that, although we are entering a period where inflation is high and the cost of living will bite, rent prices will increase as demand grows higher for rental properties.
This means that you, as a landlord, may be faced with the situation of raising the rent as a consequence of rising costs such as repairs and maintenance, while having existing tenants who are struggling to pay their rent.
Of course, that’s a worst case scenario, and the hope is that you can comfortably raise the rent in tandem with your rising costs. The pandemic saw a great many landlords and tenants helping each other out, and that collaboration may be necessary again.
The word from economists such as David Smith is that as long as we can look past the current unease (I know that’s a big ask) then the situation will improve.
Psst! If you’re looking for a good overview of interest rates, this article is a must-read.
In summary…
If you’re concerned about how high inflation might impact your rent prices, I hope I’ve been helpful and shed some light on the matter.
So, how will high inflation impact rent prices, in a nutshell? You will likely find yourself in a situation where you will have to increase rent prices, or choose to bear some of the brunt of inflation to help out your tenants.
Maybe you’re needing to sit down with a strong cup of coffee after reading that! Be my guest – and thanks for taking the time to read.
We all have so much to deal with at the moment, so when it comes to your buy-to-let property, it really does help to take advantage of all the useful information and resources out there.
Hopefully, we can be one of those, so if you’d like to discuss anything, you’re very welcome to get in touch with us for a chat and no-strings consultation.
Written by Chris Wood, MD & Founder of Portolio
Get in touch on 07812 164 842 or email [email protected]
Comments