With the rate of inflation in the UK reaching record highs, it is having an impact on every aspect of the economy. But how is it affecting property prices? Check out our quick guide to find out more
What is inflation?
Inflation is the term used to describe the speed that prices are rising. Costs almost always increase over time, but ideally, the rate of inflation should be steady enough that people are encouraged to spend money responsibly but also save and plan for the future. However, in the UK, inflation has been rising at speed, hitting a 40 year high of 9% in May 2023.
This figure is reported by the Office of National Statistics and is based on three indexes: the Consumer Prices Index (CPI), the Retail Prices Index (RPI), and the CPIH (the CPI plus owner/occupiers’ housing costs). Each of these indexes calculate the rate of inflation differently and look at the price of different goods, but the RPI is often the highest. It’s set to be scrapped in 2030, but RPI is currently used to set student loan interest rates and annual train fare increases.
What can affect property prices?
Property prices fluctuate all the time and can be affected by several different things, including the rate of inflation. If you’re a homeowner, the value of your property could change depending on its size, any wear and tear, and the desirability of its location.
As well as these individual factors, there are other trends that can affect the entire property market. The ratio of supply to demand is arguably the most influential; the more people who are looking to buy a house and the fewer houses that there are available, the higher the prices will be.
The UK economy plays a part as a thriving marketplace can inflate prices while a more cautious financial climate can cause them to stall. Interest rates may also affect the number of people who can afford to buy a home and are eligible for a mortgage.
Inflation and property prices
While you might naturally assume that an increase in the rate of inflation will also push up property prices, this isn’t always the case. Initially, inflation will usually raise home values, which can impact potential buyers, especially those looking to get onto the property ladder for the first time, who may find themselves priced out of the market.
However, over time, inflation’s overall impact can take its toll on buyers and sellers. Buyers’ budgets will be squeezed by the rising cost of living, mortgage interest rates will increase, and the number of people eligible for an affordable loan will reduce. This can lead to supply outstripping demand, causing house prices to stall or increase at a slower rate than inflation.
How does inflation affect mortgages?
Interest rates will typically rise as the rate of inflation increases as the market attempts to stabilise. This, in turn, increases the mortgage interest rates available for both fixed and variable terms.
The higher the interest rate, the fewer people who will be eligible for a loan. A mortgage with a rate of 5% will have significantly higher monthly repayments than one with a rate of 2%, for example, impacting the amount that buyers are able to borrow and reducing the amount of disposable income available to them.
Inflation can also reduce the amount of disposable income you have available due to increases in the cost of living. This can affect your affordability and reduce the amount you’re able to borrow in a mortgage.
Lenders must act responsibility and ensure that your monthly repayments are affordable for you. If added interest means the repayment will be beyond your budget, your mortgage application will likely be rejected.
How does inflation affect house deposits?
Inflation affects the price of almost everything, from the cost of food in the supermarket to the price of the petrol you need to fill up your car. If your wages don’t also increase at the same rate, you’ll end up with less money left over each month, even if you aren’t buying anything other than essentials.
This reduction in your monthly disposable income can impact your ability to save a mortgage deposit; it could take longer to save the amount you need, reduce the overall deposit you’re able to put down, or change how much you can afford to spend on a new home.
Unfortunately, if you’re unable to wait the extra time it will take to save up a healthy deposit and put down a smaller amount, this could limit the amount you’re able to borrow, the choice of mortgage products available to you, and the interest rates you can access.
Should I buy or sell a house if inflation is rising?
Choosing to buy or sell a property is one of the biggest decisions many of us will make in our lifetimes – there’s a good reason why moving house is considered one of life’s most stressful events! If you’re trying to decide whether now’s the right time to make a move, it might help to know that it’s not one-size-fits-all, it all depends on your individual circumstances.
If you have a secure job, a large amount of disposable income, and are hoping to buy a house that’s well within your budget, rising inflation might not prevent you from making a purchase. Renters looking to buy their first home may also find that inflation increases their rental costs by so much that a mortgage with a relatively high interest rate is still the more affordable option.
However, if your income fluctuates, your role is at risk, or you’re hoping to buy a home that’s at the top end of your budget, now might not be the best time to move. If the cost of living continues to increase and your finances are already stretched, you could find yourself with a very expensive asset that you can no longer afford, putting yourself at risk of property repossession or even bankruptcy.
As a seller, you may also want to wait until inflation slows before putting your home on the market. High inflation may impact your home’s value and you might struggle to find eligible buyers.
Looking to navigate your debts as inflation increases? Our team of experts is here to help. Give us a call on 0161 8260 585 or send a message here
