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With the UK experiencing a double-digit rate of inflation for the first time in 40 years (at the time of writing), it’s hardly surprising that the changes have come as a bit of a shock to the system.
The sharp rise in inflation has led to rapid increases in the interest rate as the Bank of England aims to slow down inflation. While base rate is still comparatively low when you look back over time, it’s nevertheless unsettling following a long period of significantly low rates. In recent months, we’ve seen the mortgage market scramble to keep pace as lenders try to predict where to pitch their rates amid a rapidly changing scenario.
So what does all this mean for house prices and property inflation?
In this article we’ll take a look at what inflation is, why it’s risen so much, its impact on house prices over time, the current situation and how this affects buyers and sellers.
What is inflation?
Inflation is a measure of price changes in certain goods and services over a period of time. The Office for National Statistics records the cost of more than 700 items that people buy regularly, such as a loaf of bread, a car, a holiday, a haircut or a train ticket. These items are referred to as a ‘basket’ and the overall price of the goods in that basket is the Consumer Prices Index, or CPI.
Inflation is measured by comparing the cost of this basket to the same basket a year ago. The percentage change is the rate of inflation. If a bottle of milk is £1.05 today, compared to £1 a year ago, inflation is 5%.
The Bank of England’s target for inflation is 2%. It’s currently in double digits – the highest it’s been since 1981. But given the various global crises we’ve been experiencing in recent years, it’s hardly surprising that inflation has been impacted. Things like rising oil and energy prices due to the Russia-Ukraine conflict, global supply chain issues, increasing production costs and the pandemic fall-out, have all helped contribute to the steep rise in inflation.
The resulting effect on house prices is two-fold. To combat rising inflation, the Bank of England raises interest rates in a bid to slow the economy down. It wants people to save more and spend less; if people are buying less, the rate of price increases tends to slow down.
But of course a higher base rate means higher mortgage rates, which makes a mortgage more expensive to repay, especially amid other rising living costs. While many people will be on fixed rate deals, those who are on tracker mortgages, or due for impending renewal, face a higher monthly repayment.
And when we’ve been used to incredibly low interest rates for 15 years, it’s likely that people have gotten out of the habit of building in decent margins of affordability should such a situation arise.
This, together with the overall rising living costs combined with wages that aren’t keeping up with the rate of inflation, tends to impact the demand for houses and therefore slow the rate of growth in house prices, or bring them down.
How has this affected house prices historically?
Despite fluctuations and periods of significantly high inflation, house prices have risen more than 350% in the last 70 years.
There have been various booms and busts over that time, including in the 1970s/1980s, which is the last time we saw inflation as high as it has been recently.
At that time, CPI inflation peaked at an eye-watering 25%, which led to huge increases in the cost of living, including a Bank of England base rate of 17%. Some homeowners were hit with 500% increases on their monthly repayments.
That crisis was fuelled by soaring oil prices and rising workers wages as a result of various strike action. House prices fluctuated throughout the period. An easing of credit conditions in the earlier part of the 1970s led to a boom, with house price inflation peaking at 36%. This ended with the rise in inflation resulting in an inflation-adjusted fall in house prices.
But they soon started to recover in the 1980s, due to the launch of the Right to Buy scheme.
Cycles of boom and boost are common in capitalist societies, but there’s no doubt that rising inflation has an impact on all of us, as costs rise and wages fail to keep up. It’s not all doom and gloom though as there are measures that people can take to mitigate the impacts as individuals, as homeowners, renters and landlords.
Readings has been around for almost 90 years so we have experienced ten different decades worth of boom and bust cycles and fluctuations. We’ve witnessed the changes in the Leicester property market first hand and we draw on all these years of experience when advising buyers, sellers, tenants and landlords on the best course of action in any given market conditions.
What is happening to house prices now?
The figures suggest that UK house prices are starting to fall after a long period of continued and, at times, rapid growth.
Data from the Office for National Statistics showed house prices rose 15.2% over the 12 months to July 2022, 13.1% in August and 9.5% in September. But the rise from month-to-month stalled between August and September.
In October, prices fell 0.4% month-to-month, and while there was still growth of 8.3% when compared to October 2021, this continued to slow.
It remains to be seen what impact the package of measures announced in the Government’s Autumn Statement, such as the Energy Price Guarantee and the reversal of Stamp Duty cuts, will have on inflation and the economy,
How might this affect me buying a property?
Buying a house is without doubt one of the most exciting milestones to take in life, but it can be daunting at the best of times, never mind when there is wider economic instability.
Rising interest rates could make it harder for people to buy a house, particularly first time buyers who will be facing the double whammy of house prices that are still very high, and a
high cost of living pushing mortgage affordability calculations upwards.
However, as with every boom and bust cycle, there are always opportunities for some. Lower demand is likely to see house prices fall further, and while it’s all relative if you have a property to sell as well, it could mean fewer people fighting over the same property, which is something we’ve seen in recent years. This could put buyers in a better position for negotiating even lower prices.
For anyone looking to buy a house, the key will be to carry out a robust check of your finances to see if you can afford current mortgage rates and build in room for rates to rise even higher.
How might this affect me selling my property?
At the time of writing, the average house price in Leicester was £269,606. This was
up 1% on the previous year and 17% up on the 2019 peak of £230,756.
The general consensus is that this may fall further, so if you’re looking to sell it might be worth striking while the iron is hot to maximise the gains you may have made in your property in recent years.
While market demand has slowed, people are still buying, so there could be a buyer out there for you. The best thing to do is speak to property experts to get an idea for the level of demand in your type of property and top tips on how to sell your property fast.
Factors such as size and location will have a bearing on this.
Summary
While it’s impossible for anyone to say what will happen with complete certainty, inflation in the UK is currently predicted to fall sharply in the middle of 2023.
According to the Bank of England, factors such as the energy ca
p, an easing of production difficulties and less demand for goods and services due to the squeeze on people’s finances, should all serve to slow the rate of the rise.
In the meantime, it’s all about good budgeting and planning to mitigate the impact. This includes making small savings where you can and shopping around for the best deal on mortgage rates when it comes to re-fixing or taking out a new one.
For some people, a calmer housing market represents the perfect opportunity to get on the housing ladder, or take the next step on their property-owning journey.
The best thing you can do if you’re looking to buy or sell a home is speak to the property experts in that area. As long established Leicester property experts, we can help answer any questions or give advice about the local property market. Please get in touch, or call Readings today and we’ll be happy to help.
You can rest assured knowing you’ll have a fully accredited team by your side.
