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By Ian Errington

Head of Residential Property, Blacks Solicitors


Rising Inflation and the Impact On Landlords

The Covid pandemic has had a significant impact on the economy, with long term consequences that are still not fully appreciated. While the lifting of restrictions has boosted consumer spending and increased confidence and demand, it has also increased the costs for goods and service providers. 

These impacts are of course finding their way to the consumer across the board and are having an ongoing effect on the economy. A sudden rise in inflation can have clear effects on the property market, so for investors and landlords, it’s essential to be aware of how it works and what is required to insulate from any potential risks. 

Are we revisiting the 1970’s? – squinting down the road into the distance


We have had historically low interest rates since 2009. The property market has reacted to those rates and house prices have increased significantly as the low rates have allowed house purchasers to pay more, especially when the UK population has increased without substantially more new housing stock becoming available.

Generally, though, interest rates have decreased for nearly three decades.

Inflation in the general economy is now widely accepted as not being transitory. Part of this inflation is as a result of supply problems – short terms shortages increase prices and limit availability. These will probably resolve themselves over time, although this seems to be taking longer than everyone expected, (for example - the price of second hand cars has increased significantly because of a lack of available microchips to build new cars with).

The other cause of inflation is monetary. Central banks have created large amounts of new money to help deal with the economic consequences of the pandemic. This extra money has found its way into the property market, the stock market and commodities, and is causing inflation – especially among “investable” commodities. This is inflationary.

Once inflation becomes ingrained, workers and employers start to anticipate inflation in wage increases and the pricing of goods and services – which becomes inflationary in itself and repeats over and over again. This is what economists refer to as a wage-price spiral – once inflation really gets going, it's difficult to stop. This is bad news because it erodes the value of savings, and everyone ends up feeling poorer and are all playing “catchup” to claw back their standard of living.

Controlling inflation

It is the Bank of England’s (BoE) job to control inflation in the UK. The Bank is currently well away from its two per cent target. The Bank’s main tool to slow inflation down is increasing interest rates. The base rate was increased in November 2021 to 0.25 per cent - still very low, an increase of only 0.15 per cent - a minuscule amount by historic standards. 

Such increases are unlikely, in my view, to have much of an impact upon inflation. We can therefore expect more rate rises in the coming months. There is a concern that if the BoE does not get on top of this, they will not slow inflation, and will end up having to increase rates more and more quickly to tame the inflation beast.

What does this mean for landlords?

If the above is correct, we can expect higher interest rates – higher than have been seen for many years. What will this do to the housing market and the value of UK property? Will higher interest rates reverse the increases in house prices we’ve seen over the last few years? Will higher interest rates impact affordability levels? 

It's difficult to say for sure – but it's not looking great.

Investing in real-estate is often seen as a natural protection against inflation. This is important as inflation can eat away at an investor’s return, especially when thinking about long-term investments. Investors and landlords should consider assets that can offer them higher returns over inflation, to beat its effects.

On average, rental prices have increased annually by 2.3 per cent across the UK. In an inflationary environment where income and expenses are rising,  landlords with short term leases can expect to slowly increase their rent over time to make sure they’re in-line with inflation. The ability to increase rental prices gives landlords the opportunity and flexibility to cover their costs without being negatively impacted by the effects of inflation. In a market with strong demand these rent increases should exceed expense increases.

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

In conclusion

The period of  inflation of the 1970s and early 1980s is seen in the rear view mirror of history as a very bumpy road for the UK economy. Property values rose markedly over that period of time. If we are in for a period of high inflation, and higher interest rates, incomes may be stretched, but increases in incomes will follow – even if there is a time lag between the two. 

Over the long term, property should remain the safe asset it has been. There may be short term difficulties, but for long term buy-to-let investors, these may become buying opportunities. If mortgage rates increase, and borrowing becomes more expensive, rents will follow.

Nobody has a crystal ball – the above is just one opinion of what may be coming our way. Fixing interest rates on mortgages looks like an easy way to save your suspension and provide some comfort if the road becomes bumpier than it has been.

*Ian Errington is head of Residential Property at Blacks Solicitors 

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