In the recent past, nobody in the property market has really given a second thought to inflation. Inflation has been such a minimal amount that it hasn’t had any real influence in the market.

As we move into 2022 however inflation is becoming a more significant influence. So here we’ll consider how rising inflation might affect the property market.

At the time of writing UK inflation is 4.2%. The Bank of England forecasts that inflation will reach 5% in 2022.

Very roughly, everything you buy today could be 5% more expensive next year. Something that costs £100 today will be £105 then. Not all that much maybe, but on a weekly or monthly basis it adds up very quickly.

When inflation is mentioned, people mostly think about the cost of food and fuel, but it has significant implications for the property market, which we will look at here.

Inflation hits property market sentiment. Sentiment is something that is often overlooked when trying to forecast the property market, but it is a very real influence. If people feel poorer due to inflation they are less likely to think about buying a new house, becoming first time buyers or upgrading to a bigger rented home.

Inflation hits affordability. If consumers are spending more money on, for example food, fuel and transport, they immediately have less money every month to spend on a mortgage or rent. If they decide to, or have to, move they’re likely to look for cheaper property, cheaper areas and/or make lower offers than they might otherwise have done.

The situation can be even more complicated because inflation tends to lead to higher wage rises, and higher wage demands, which makes some people feel better off even when they are actually worse off.

Inflation hits construction costs. It affects the cost of both building materials and wages. The cost of materials for an average house increased 14% between January and September 2021 according to the Building Cost Information Service.

Rising construction costs push up the costs of new houses, push up prices and can even make developers less likely to build. And that’s something which affects the values of existing houses too. Perhaps bizarrely inflation can push up house prices because fewer houses come onto the market and so housing supply falls.

Inflation can affect interest rates which increases the cost of mortgages. This is the really big issue when it comes to inflation and the property market of course. It means mortgages become more expensive, fewer people can afford to buy and more householders run into financial difficulties. All of these things exert a downward influence on property prices.

At the moment interest rate rises are pretty much inevitable. Reliable forecasts suggest that base rate will be 0.75% this time next year.

Again that might not seem much but it can be very significant. For example a 1% rise in the interest rate on a £200,000 mortgage on a typical standard variable rate would push up repayments by around £105 a month.

You can calculate how a rising interest rate might affect your mortgage using this tool.

The issue of the inflation rate-v-interest rate is perhaps even more complicated than in the past. In the past the interest rate was a simple medicine for inflation. When inflation threatened the Government (or, today, the Bank of England) notched up the interest rate to rein it in, or vice versa. It’s not so simple nowadays. Ultra-low interest rates have been used to keep the economy going. They’ve led to massive levels of mortgage debt – the FCA estimates that residential mortgage debt in the UK is over £1,584 billion. A small rise in the interest rate could potentially cause a huge shock in the economy and so to the property market.

So what will a higher rate of inflation mean for the property marker in 2022 and beyond?

Firstly, bear in mind that inflation of 5% still isn’t all that much compared to the past. UK inflation actually peaked at 24% back in 1975! So it’s important to keep a sense of proportion.

But higher inflation can impact the property market in many (and many often not-appreciated) ways. It can do some or all of: Increase the cost of borrowing, hit affordability, make everyone poorer and less likely to move, increase repossessions, dampen the property market and push prices down. Potentially it could even push prices up in some cases.

So, now that inflation is no longer just a token but a number which can exert some real influence in the market it’s important for everyone in property to keep an eye on inflation and consider how it might affect the market.


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