Inflation – Good or Bad for the Property Market?

The latest Consumer Prices Index (CPI) released by the Office for National Statistics revealed that inflation increased from 1.7% in September to 2.3% in October.

But how exactly does inflation impact the property market?

There is a link, but it is not quite as simple as it might seem.

Inflation and House Prices

When inflation rises or falls, it does not necessarily mean that house prices are rising or falling. The CPI, the main measure of inflation in the UK, does not include house prices or mortgage costs – although it does include rents.

However, rising inflation increases the price of almost everything we buy and can affect house prices indirectly. If people have less disposable income, they may be less likely to move house. Or they may make lower offers if they do. That can exert downward pressure on house prices. The reverse can also happen when inflation falls.

Inflation and Interest Rates

Inflation can also affect the interest rate and, consequently, mortgage payments. The Bank of England (BofE) uses the interest rate to try and keep inflation under their 2% target. When inflation rises, the BofE may raise the interest rate (or bank rate) to try to bring inflation down and reduce it if inflation starts to fall. Mortgage lenders often base their mortgage rates on the current bank rate.

So, when inflation rises, it usually means mortgages become more expensive. That could serve as a check on property prices. When inflation falls – as it has done in recent months before October's rise – it ought to mean that mortgages become cheaper. That, alongside the fact that (hopefully) we all have a little more disposable income, could work to push house prices up.

Inflation and Rent

For landlords and tenants, inflation almost always pushes up rents. While rising rents are not good for tenants, they can benefit landlords directly. Landlords should find they can earn more rent, which should improve their rental yields, too.

Long-Term Property Trends

Over the long term, property prices usually rise ahead of inflation. A 2020 report from property experts Avison Young said that across all 5-year rolling periods since 1985, property investors beat inflation around 85% of the time.

So, whether you are an owner-occupier, landlord, or investor, property tends to be an excellent hedge against inflation.

A well-priced, well-presented property should always find a buyer, whatever happens with inflation.

If you're considering selling or investing, we will be delighted to advise you and help you make fully informed decisions.

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Frequently Asked Questions

1. How does inflation affect house prices?

Inflation indirectly impacts house prices by influencing disposable income and buyer behaviour. High inflation can reduce affordability and exert downward pressure on prices, while low inflation can boost buyer confidence and push prices up.

2. How does inflation impact mortgage rates?

The Bank of England adjusts interest rates to control inflation. Higher inflation typically leads to higher interest rates, making mortgages more expensive, while lower inflation often results in cheaper mortgages.

3. Does inflation affect rental income?

Yes, inflation often leads to rising rents, which benefits landlords by increasing rental yields. However, this can be challenging for tenants managing cost-of-living increases.

4. Is property a good investment during inflation?

Historically, property prices have risen faster than inflation, making property a reliable hedge against inflation. Over time, property investments often outperform inflation.

5. Should I buy or sell during periods of high inflation?

The decision depends on your financial goals and circumstances. If you're selling, a well-presented property can still attract buyers. If buying, consider how inflation and interest rates might affect your mortgage repayments and affordability.