How Does Rising Inflation Affect the Property Market?

Find Out How Rising Inflation is Affecting the Housing Market

rising inflation affect house prices

How Inflation is Affecting House Prices

how rising inflation affects property market

Rising inflation tends to lead to higher interest rates. This, in turn, can slow house price growth.

Bank of England governor Andrew Bailey recently apologised for rising prices and warned that inflation could rise as high as 5%. However, these predictions have turned out to be overly optimistic.

The level of inflation in the UK has already reached 9.7% in the 12 months to March 2022 – the highest rate in almost ten years, according to figures by the Office for National Statistics. And, many observers think this might just be the beginning.

So, how does rising inflation affect the property market? Inflation at this level will have a major influence on almost every aspect of finance – including the housing market. Here at SlothMove, we’ve looked at what that impact might be. Read on to find out how inflation is affecting house prices in the UK.

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What is Rising Inflation?

The rate of inflation measures the change in prices for goods and services over time. When inflation is rising, it means that things are becoming more expensive. For example, if inflation is running at 6%, it means something that cost £1 last year will cost £1.06 this year.

There are a number of different indexes that measure changes to inflation. The key one that affects the housing market is the Consumer Prices Index (CPI). This measures the price changes in a basket of 700 goods and services regularly purchased by consumers.

The Bank of England is tasked with keeping the inflation rate below the 2% mark. However, over the past 20 months, the Covid-19 pandemic and the economic standstill of lockdown have meant that reactivating the economy has taken priority over keeping inflation under control.

Interest rates are the main control used by the bank to regulate the economy. For instance, to deal with the 2008 financial crisis, the Bank dropped rates to 0.5% by Match 2009. In August 2016, Brexit worries meant that rates went down to 0.25%. And, the Covid crisis caused them to fall to just 0.1%.

Why is Rising Inflation Happening Right Now?

There are a number of factors that have combined to cause rising inflation right now.

On the one hand, disruption to global supply chains has led to higher shipping costs. This, in turn, has caused the price of certain goods to increase.

At the same time, the Russia-Ukraine conflict has led to higher oil and energy prices in the UK. In fact, energy prices have already increased significantly and, according to Ofgem, the energy price cap is set to rise by £693 from April 2022.

These price rises not only impact the cost of heating your home and putting fuel in your car, they also push up the prices of goods that need to be manufactured or transported.

Meanwhile, staff shortages, largely resulting from Covid, mean that some companies have had to increase wages to attract employees. This cost increase is typically passed onto consumers.

But how will these consumer price increases affect the property market?

Does Rising Inflation Mean House Prices Go Up or Down?

Given what we’ve just learnt, you might expect rising inflation to lead to rising house prices too. But this isn’t necessarily the case.

In fact, as a general rule, rising inflation tends to lead to slower house price growth.

One reason for this is that when interest rates rise, so do mortgage rates. This makes buying a home more expensive.

Meanwhile, when inflation is rising, people are forced to spend more of their income on the daily necessities, such as food, fuel and heating.

Both these factors reduce the amount people can afford to spend when purchasing a property. As a result, house price growth tends to slow when inflation is rising. The impact is not immediate, however, and it may take a number of months before higher inflation is reflected in lower levels of housing market activity.

Does Rising Inflation Make it Harder or Easier to Get a Mortgage?

Mortgages are of course linked to the Bank of England base rate – the rate at which the Bank itself will lend to other lenders. So, any increase in the base rate means an immediate surge in tracker mortgages. These types of mortgages are directly linked to the base rate, and variable rate mortgages will soon follow.

Those who have a fixed mortgage will have some time to wait before their mortgage repayments are affected by the rising interest rates. Their mortgage repayments will be fixed for up to 10 years, depending on the deal they arranged with their lender. However, if their fixed term is coming to an end soon, their mortgage rates will likely be up when it comes to renewing.

But the real impact will be felt by those taking out a new mortgage. Markets expect a 0.5% climb in the interest rate on a new two-year fixed rate mortgage to 1.7% by the end of the year. This will be a blow to households already under pressure from soaring living costs. An increase of this scale would add almost £50 per month to the cost of paying off a typical £200,000 mortgage.

As a result of rising mortgage rates, an increase in inflation tends to make it more difficult to get a mortgage. That’s because lenders need to be sure you’ll still be able to afford your monthly repayments despite rising living costs.

With the cost of living increasing, mortgage lenders may worry that you’ll have to spend more of your income on things like food and energy – so you will have less money for your mortgage repayments.

Lenders will also be wary that higher inflation will lead to further interest rate rises. Higher interest rates will cause the cost of future mortgage repayments to rise. Even if you’re applying for a fixed mortgage rate, which doesn’t move up or down in line with changes to interest rates, lenders will still be wary. That’s because they’ll want to be certain that you’ll still be able to afford the repayments when your current mortgage ends and you transfer onto their standard variable rate.

That said, you shouldn’t panic! Future interest rate rises are already built into lenders’ affordability calculations. If they didn’t think you could afford it, they wouldn’t have agreed to lend you the money.

What Does More Expensive Mortgages Mean?

More expensive mortgages mean a housing market slowdown.
Many thought that the Stamp Duty Land Tax holiday was fuelling the property market – with many rushing to purchase homes while they didn’t have to pay the dreaded Stamp Duty. However, the fact that the housing market remains buoyant now that the holiday has ended suggests that the real factor is the low cost of borrowing.

Thus, a steep climb in borrowing costs would have a major impact on house price affordability. Those rising prices that still seem fairly affordable now will look much less so if the cost of borrowing increases.

While we might not be looking at a collapse in house prices, any increase in interest rates could mean that homes are less affordable. The housing market could rapidly slow, and some buyers who have overstretched themselves could be in major financial difficulty.

Is it a Good Idea to Buy a Property During Times of Rising Inflation?

There is no simple answer to this question – it largely depends on your individual circumstances.

Do you have a secure income? Do you have room in your budget for a rise in your mortgage repayments? If so, there is no reason to delay buying a property now if you want to.

However, it might not be the best time to make a big jump up the property ladder if your budget is already quite tight. Mainly because you could struggle to afford higher mortgage repayments if other costs continue to rise.

If you’re currently renting but are thinking of buying a house, it’s worth being aware that your rent could also go up as a result of rising inflation. In some cases, it might actually be cheaper to buy a home than to rent one.

The most important thing to do if you’re thinking of moving home, is to sit down and create a thorough budget. That way, you’ll be able to see exactly what you can afford before going ahead with anything.

Is it a Good Idea to Sell a Property During Times of Rising Inflation?

With inflation rising, house price growth is likely to slow. So, selling your property now could enable you to lock in the gains you have already made.

The higher cost of living is also likely to slow down the property market. This means, if you wait to sell your home, it could take longer to find a buyer.

That said, you shouldn’t base your decision to sell or not to sell purely on what’s happening to inflation. You should also ask yourself whether now is the right time for you to sell personally and considering your individual situation.

What Can Homeowners Do to Protect Themselves From Rising Inflation?

The most important thing you can do to protect yourself during times of inflation is to review your budget. You must make sure you know exactly how much you have going in and out each month.

Some other things you can do include:

  • – Look for any areas where you can reduce spending e.g. cancelling subscriptions or switching utility provider

  • – Think about remortgaging to a cheaper deal if you’re on your lender’s standard variable rate


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