How Does Inflation Affect Property Prices?

Average annual house prices in the UK have been steadily increasing since way back in late 2008. According to the Office of National Statistics (ONS), UK house prices increased by a massive 9.6% year on year between 2021 and 2022.

While many factors have contributed to this increase in house prices (including everything from COVID-19 lockdowns to a lack of new builds), inflation can certainly be found close to the top of the list. In this blog post, we’ll look at the effect of inflation on house prices and the best way to deal with it as a house owner.

What Is Inflation?

Inflation is defined as the price increase (usually shown as a percentage) of any goods and services in a particular economy (e.g. the UK) over a given period of time. Inflation signifies a decrease in cash purchasing power as goods and services get more expensive.

What Causes Inflation?

The causes of inflation vary depending on specific moments in time. As of 16 November 2022, the UK inflation rate year on year is an eye-watering 9.6%, with indicators suggesting that this could continue to increase to over 10% during 2023.

At the moment, factors such as increases in production costs (e.g. raw materials and wages), geopolitical instability and supply and demand for basic necessities such as food and housing contribute to an increase in inflation and, therefore, living costs.

How Does Inflation Affect House Prices?

In terms of the housing market, the rate of inflation causes house prices to increase or decrease in line with the price of goods and services. When inflation rises, it can cause the price of properties to increase over and above where the average value might sit – due to simple supply and demand.

High inflation rates cause fewer homeowners to want to move, meaning there are fewer properties on the market for buyers to choose from. This increased demand for a small number of properties causes the house value to rise which often leads to many potential buyers, especially first-time buyers, being priced out of purchasing a property. Effectively, homes can often be worth more when inflation is higher.

It’s important to note there is a balance between inflation and property prices. If inflation causes mortgage rates to increase too much, buyers will not be able to apply for loans and therefore demand will decrease. When this happens, house prices will decrease.

In recent years, inflation and demand have caused the average property value to increase greatly.

For example, in January 2022, the average UK house price was £274,000. Just one year earlier, in January 2021, this number sat £24,000 cheaper at around £250,000. Unfortunately, it’s not possible to predict inflation precisely and therefore it is hard to say how house prices will change over the coming months and years. However, it’s important to remember that inflation must end at some point and house prices will be affected again when it does.

Is Inflation Good for Homeowners?

Property is often considered a good “hedge” against inflation. As the cost of living rises, so does the cost of buying your own home. However, whilst an increase in property prices looks great on paper to anyone looking to sell, there are a couple of things to be wary of, which unfortunately mean that the answer isn’t always clear-cut.

1. Variable Rate Mortgages Could Become Problematic

If you’ve not taken out a fixed-rate mortgage and are instead relying on wishful thinking to keep your variable-rate mortgage at a manageable level, it might be time to reassess and see if you could move on to a fixed mortgage for one or two years to ride out current inflation growth. A variable mortgage will “follow” the current interest rates (which are influenced by inflation), so you might find your monthly repayments reach uncomfortably high levels, risking the ability to repay what you owe month on month.

2. …But the ‘Real Value’ of Your Current Mortgage Could Decrease

For homeowners on a longer-term fixed-rate mortgage, inflation can often be a massive boon when looking purely at debt. After all, a £200,000 mortgage debt in 2042 will be “worth less” than £200,000 in 2022.

If you have a 1% “nominal” interest rate on your mortgage, but the current inflation rate sits at 3%, your “real” interest rate has actually just become -2%! Not bad when you’re dealing with a debt that’s potentially in the hundreds of thousands.

3. Your House Is Worth More… but Who Will Pay?

On the surface, getting an amazing house valuation is cause for celebration. However, this may be problematic when the cost of living also rises, and inflation causes the cost of borrowing money to tick upwards. Potential buyers may find themselves priced out of house types or locations they had previously been able to afford. Remember — there’s a difference between how much a house costs and how affordable it is.

When new (i.e. non-fixed) mortgage interest rates rise thanks to inflation, money becomes more expensive to borrow. This may lead to fewer buyers financing, no longer having sufficient deposits to help reduce the monthly mortgage amount, or deciding to sit tight and ride it out, therefore not purchasing a home at all.

4. Does inflation increase house prices?

It is true that inflation can raise housing costs in a number of ways. First off, people frequently turn to real estate as a hedge against currency depreciation due to inflation, which reduces the purchase value of money. Prices may rise as a result of the ensuing spike in demand for homes.

In addition, inflation often drives up the cost of building, which affects the total value of properties. Growing labour and material expenses can drive up the cost of developing new properties, which in turn affects market prices for real estate.

However, it’s important to understand that there are many moving parts and a complex link between inflation and home values. How inflation affects the real estate market is also greatly influenced by a number of market dynamics, housing supply and demand balances, and regional economic situations.

How to Take Advantage of Inflation When Selling Your House

Inflation may put you in a stronger position overall if the price of your house has effectively “outperformed” the house type or area in which you’re looking to buy. In this case, ensuring you have your mortgage in principle ready and (ideally) a quick house sale of your property lined up will put you in the best possible position to move.

Supply and demand are often cited as the single biggest factor in increasing house prices. But what if demand drops as the cost of borrowing increases? It possible that these two market forces would help each other balance out but this should not be expected or relied upon.

Should I Sell My House Fast Now or Wait?

While selling your house during a price boom generally means a better financial deal at the end of it, the issue comes when looking to purchase your next home. Sensibly-priced properties may become rarer, which means you’ll compete with more buyers, and fixed-rate mortgage offerings may not be as enticing as before.

Factors you should consider will likely include:

• Budget: Will this move improve your financial situation — or at least maintain it?
• Urgency: Is there a particular need (rather than a want!) to move house? For example, do you need to relocate for work, change address due to divorce, or release home equity to pay for other necessities?
• Deals: Can you secure a good mortgage term that’s sensible in both the short and longer-term, without compromising your budget or settling for poor terms and conditions?
• Next Home: Is there a property you’ve already got your eye on that ticks all your priority boxes and is priced in a way that offers good value (rather than being priced over the odds?).

Sell Your House Fast During Times of Inflation

A traditional on-market sale with an estate agent can take up to 4.2 months on average in the UK, depending on the condition and location of your home. So if you’re struggling to sell your house fast to downsize due to the current cost of living, the traditional sales route may not be the best option for you.

Here at House Buyer Bureau, we are genuine cash house buyer, which means we have funds ready to purchase your home in as little as 7-days. Get in touch with our friendly team of house-buying experts today to discuss your needs and get a free, no-obligation cash offer worth up to 85% of your home’s on-market value. 

If you accept our offer, we’ll take care of everything, and there are no estate agents or legal fees to pay (when you use one of our recommended solicitors). Reduce the stress and expense of selling, make the most of a buoyant house valuation and start afresh somewhere new.

Become a ‘Power Buyer’ to Put Yourself Ahead of the Pack

Supply has been an issue for the UK housing market for some time now, resulting in small demand increases having a disproportionate effect on house prices and availability. In a buoyant housing market, buyers have to work much harder to compete for fewer properties. 

So how can you make yourself stand out?

Around one in four house sale chains break in the UK every year, so having a solid offer on your property that you know isn’t going to fall through will put you in excellent stead with sellers. And if your property’s value has increased thanks to the current market, you could also find yourself with a better deposit, which may convince banks to give you a fast turnaround on a mortgage in principle, to everyone’s benefit.