Inflation is a regular occurrence in any economic lifecycle – but is property investment the best way to protect against it?
A sudden rise in inflation can have a notable effect on the property market, so for investors, it’s essential to be aware of how it works and what is required to insulate from any potential risks.
What is inflation?
Inflation is an increase in the price of goods and services over a certain period of time. Every economy experiences inflation and its driving forces can vary. Common factors are things like a sudden spike in the need for certain products and services, an increase in wages, production expenses or the cost of raw materials.
How could inflation affect the property market?
The property market is rarely affected negatively by inflation. Firstly, property values tend to increase along with other goods and services. Secondly, as the prices of construction materials go up the cost of developing properties inevitably follows. The knock-on effect is slowed production and an increase in the price of new homes.
As the cost of borrowing also usually goes up during an economic downturn, rental rates increase as many people will continue to rent rather than buy due to unfavourable mortgage rates. Consequentially, the growing number of tenants increases demand – which is great news for property investors.
With inflation rising, is buying property a smart investment?
Increasing property prices are fairly likely during periods of inflation and the jump in value tends to offset the rise in prices elsewhere in the economy. And, because property is a leveraged asset, as long as the interest rate doesn't change, your payments remain the same as the value of your home increases.
You can also make money on your deposit. For example, if inflation were to double the value of your property, the value of your down payment has also increased. If yours is a fixed-rate mortgage there's more good news as you'll pay back less than initially stated.
Taking into consideration the ongoing economic situation in the UK, a continued rise in inflation seems likely. However, by making the right investments it’s possible to limit the effects of a rise in prices. If done right, buy-to-let is a profitable and secure long-term investment that can also pay dividends in the short term. To find out how much you could earn, get a free 60-second valuation today.