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Will inflation spell disaster for UK landlords?

The Covid-19 pandemic had a significant impact on the UK economy with long term consequences that are yet to be fully understood. While the end of restrictions has stimulated consumer spending and demand, it has also led to increased costs for goods and service providers.

Inflation, one of the most concerning consequences of the pandemic, has had direct implications for the property market, making it essential for landlords and investors to comprehend the implications and take necessary steps to mitigate potential risks.


Inflation rates impact the UK property market

The current economic climate has led to historically low-interest rates, resulting in a significant increase in house prices. Low rates have allowed house purchasers to pay more. Meanwhile, the UK population has continued to increase without substantial new housing stock becoming available.

Inflation in the general economy is now a widely accepted phenomenon due to supply problems that continue to affect the availability of goods and services. The situation may resolve itself over time, but how long this may take, nobody knows.

Central banks have created significant amounts of new money to deal with the pandemic's economic consequences. This extra money has found its way into the property market, stock market, and commodities, causing inflation, especially among "investable" commodities.

Current inflation has the potential to create a wage-price spiral, where the anticipation of inflation becomes a self-fulfilling prophecy as employers and workers scramble to pay more and earn more . This causes erosion of savings value and may lead to a decline in the standard of living.


What has the BoE done?

The Bank of England (BoE) is responsible for controlling inflation in the UK. The bank's main tool to reduce inflation is increasing interest rates. At its meeting ending on 22 March 2023, the MPC voted by a majority of 7–2 to increase Bank Rate by 0.25 percentage points, to 4.25%

Landlords can continue to expect higher interest rates in the coming months. The implications for the housing market and the value of UK property are uncertain. It is unclear whether higher interest rates will reverse the increases in house prices seen over the last few years or impact affordability levels.


The buy-to-let-solution

Buy-to-let properties can offer significant benefits and protection against inflation, which is crucial in the current environment of burgeoning inflation rates.

Property should remain a safe asset in the long term, although there may be short term difficulties. For long term buy-to-let investors, this may be time to buy outright. If mortgage rates increase and borrowing becomes more expensive, rent increases are likely to follow.

In the current environment of high inflation and higher interest rates, incomes may be stretched. Increases in pay and income are likely to follow, albeit with a delay. Fixing interest rates on mortgages may provide comfort to landlords and investors as time goes on.