Inflationary pressures easing on the UK Property Market

Created: 07 Mar 2023

Persistently high levels of inflation have impacted the UK’s property market, with prices softening in recent months and affordability rising up the agenda for buyers. With interest rates now stabilizing lenders are increasingly able to evaluate their mortgage selection and act with greater certainty, which could support demand and activity in the property market.

Since December 2021, interest rates in the UK have risen steeply to combat inflation, The Consumer Prices Index (CPI) increased 10.1 per cent annually through to January 2023, declining from 10.5 per cent in December 2022. The Bank of England has raised interest rates from 3.5 per cent to 4 per cent in January 2023, and is expected to undertake a final raise to 4.25 in March 2023 before falling in 2024.

This level of inflation has impacted how consumers, businesses, and investors manage their finances, which in turn has affected the UK property market. House prices have softened, but the market is stabilising, with a decline in buyer demand in recent months. However, a reduction in wholesale energy costs, which are key driver of CPI increases, could see a sharp decline in inflation throughout 2023.

For investors, inflation can be both a blessing and a curse. On the one hand, if property prices rise in line with inflation, investors see the value of their portfolio increase. However, if inflation outstrips rental income, investors may find that their rental yield decreases, leading to a reduction in their overall return on investment. 

The dynamic remains favourable from a BTL perspective however, with the latest Nationwide house price index average house prices have decreased 1.1 per cent annually to £257,406. Meanwhile UK cities, and commuter towns like Luton, have experienced rental increases of 11.5 per cent on average annually according to bloomberg. 

“Conditions should gradually improve if inflation moderates in the coming months as expected, easing pressure on household budgets. Solid gains in nominal incomes together with weak or declining house prices will also support housing affordability, especially if mortgage rates edge lower in the coming months.”