Why The Latest Inflation Data Has Huge Implications for Landlords

By 5 min read • June 13, 2023
Lots of stickers with percentage numbers on them.

Most Britons will by now be aware that the UK, and for that matter most of the developed world, are experiencing a cost-of-living crisis. The repercussions of Covid driven damage to international supply lines, generous government fiscal policy and Russia’s decision to invade Ukraine have caused prices to skyrocket. Inflation increased to a 40-year high over the winter, with food inflation spiralling beyond 19% in March of this year. Surely, therefore, the news that inflation is beginning to fall would be greeted with open arms and booming markets. Unfortunately, this doesn’t seem to be the case.

In May, the Office for National Statistics (ONS) reported the UK inflation for April had fallen into the single digits for the first time since August of 2022. Inflation for the 12-months up to April fell to 8.7% compared to 10% in March of this year. One would hope that this is the beginning of the end of double-digit inflation. However, the challenge is not that inflation has fallen, but that it has fallen less than both the Bank of England and markets were expecting. Financial markets had priced in the prospect of inflation falling to 8.2% in April, whereas the Bank of England had forecasted inflation of 8.4% – both less than the actual figure.

It’s certainly not the first time the Bank of England’s forecasts have had room for improvement. But the problem is that this time it has significant implications for landlords and households alike. Higher than expected inflation increases the likelihood that the Bank of England will need to continue increasing interest rates over the short term. With the base rate currently sat at 4.5%, many commentators believed that the interest rates had peaked, or at least were close to peaking. The market is now forecasting that the Bank of England will continue raising interest rates up to 5.4% by the end of 2023, before slowly falling back down to 3.4% over the next five years.

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What Does Higher Inflation Mean for Mortgage Rates?

The biggest and most direct implication for landlords will be the repercussions of higher interest rates feeding through into higher mortgage rates. Swap rates skyrocketed following the release of April’s inflation data, forcing many lenders to pull their mortgage deals from the market. On the 8th of June HSBC withdrew all of its loans for new borrowers, with the expectation of re-releasing them later at higher rates.

Mortgage rates are still below their October 2023 peak of 6.50%, following the release of the mini budget. However, rates are edging upwards with Better.co.uk reporting that the average cost of a two-year fixed rate deal stands at 5.08%, having risen above 5% last week. Average costs of a three-year deal stand at 4.87%, while a typical five-year deal today is 4.65%. Standard Variable Rates (SVR) are even higher, with the average landlord now paying more than 7.34% on a variable rate mortgage.

It is estimated that over 1.4 million UK households are on variable rate or tracker mortgages, meaning that they will see an immediate increase to their borrowing costs. If mortgage rates were to rise from 4.75% to 5.00% on a typical £200,000 mortgage, monthly payments would rise by around £30 per month, or £360 per year. Although 60% of UK households remain sheltered from higher rates by long-term fixed rate deals or outright homeownership, rising rates still have huge financial implications for many households. 

What Does Higher Inflation Mean for the UK Economy?

Ultimately, higher than expected inflation and the subsequent increases to interest rates that it may cause can only ever be a negative sign for the UK economy. Directly, higher than expected inflation readings suggest that the Bank of England’s belief that inflation would be ‘transitory’ seems less and less likely. That is, the belief that high inflation would be temporary. Instead, higher inflation looks set to remain in the medium term, as prices remain ‘stickier’ than expected.

What is more, the expectation that the Bank of England will need to continue raising rates will act as a further drag on the UK economy. Higher rates increase the cost of private credit, making it harder for households to finance big ticket items such as new cars or homes. Gone are the days of 0% interest for the first 12 months. As a result, consumer spending will fall, and projections suggest that the UK’s GDP will flatline for the rest of the year. Some experts are even suggesting that the UK may enter recession over the next six months. However, these forecasts only suggest a minor reduction in GDP of -0.3% to -0.1%. Nonetheless, a stalling economy with higher public financing costs and an ever-increasing bill for key public services such as the NHS and welfare support will inevitably increase pressure on the government to stall tax cuts or even look for additional areas to squeeze extra tax revenues.

The positive news for landlords is that employment is holding up far better than expected, so there remains a ready supply of income earning tenants. However, with inflation squeezing disposable incomes and rising interest rates squeezing the public purse strings, the government may turn once again to landlords as a source of politically popular tax revenues.

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What Does Higher Than Expected Inflation Mean for House Prices?

Whilst the exact data may vary depending on what source you rely on, what is for certain is that house prices in the UK are beginning to wobble. Halifax reports that the price of the average home fell by 1% in the year to May. This marks the first time that Halifax have reported falling year-on-year house prices since December 2012. Even more starkly, Nationwide reports that house prices on the mortgages it provides fell 3.4% in the same period – the largest drop since July 2009. House prices are now 4% below their August peak, with many lenders and agents reporting a weakening market.

As this blog has argued before, landlords should not look at house prices as a nominal value, it is important to take into account inflation and how this impacts the real return of investing in housing. What good is it if your £100,000 house is only worth £90,000 in today’s money? When we consider that inflation has been running in the double digits for almost a year, it is fair to assume that real house prices – taking into account inflation – have fallen by around 15% on average.

Despite a 15% fall in real terms, the smart money is on house prices continuing to fall in the short term. Rising rates combined with an increasing number of households finding their fixed-rates elapsing will put a downward pressure on house prices. At the moment, nominal house prices are being supported by the stubbornness of sellers. Many sellers are reluctant to put their houses on the market for lower values, opting instead to delay selling for the time being. This artificially supports house prices in the short term whilst transactions fall off a cliff. However, as the UK’s economic woes continue, it is likely that more and more forced sellers will enter the market, leading to a steady fall in house prices. Ultimately, so long as rates continue to rise, the cost of purchasing a home will become more taxing and the amount that buyers can afford to pay will begin to fall.

Despite all the doom and gloom, it is worth remembering that house prices in the UK are part of our nation’s fabric. For most households, their house is their largest single investment. It is not politically expedient for the government to allow house prices to fall in the run up to a general election. Ministers may be happy to sit by whilst the real value of homes are eroded through inflation, but as soon as house nominal house prices begin to fall to a greater degree and homeowner begin to take notice, they may be forced to take action. Much like during Covid, when Stamp Duty was withdrawn, the government may look to introduce an extension to Help To Buy or another form of scheme to support both housebuilders and house prices. This may provide a safety line for landlords and property investors.

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