Is inflation good or bad for
Who wants to pay more for things? On the face of it inflation may seem like an economic puppy dog that needs to be kept under close control. Indeed, in the UK the Bank of England employs some very smart people to try and hold the lead. Or at least throw the stick. However, there are always two sides to the pound coin, and while inflation may hit some it could help others. To answer the question: is inflation good or bad for property investors, we are presenting a balanced view to help you to decide for yourself.
What is inflation?
Fundamentally inflation is the gradual increase in price of goods and services over time. This increase is calculated on the cost of food, rent, bills and other daily living expenses, when compared to the cost of them from the previous year. The result of an increase in the costs of goods and services is that cash begins to lower in value. This is because you will be able to buy less with the same amount of money.
Essentially there are two ways in which inflation can happen. Firstly, demand can outstrip the supply of goods and services, which will increase their price. Secondly, if the Government injects more printed money into the economy it can reduce the overall value of the pound, which in effect, drives prices up. So as property investors, what does this mean?
Is inflation bad for landlords?
From the perspective of a property investor, the primary concern relates to an increase in the base rate for lenders. The Bank of England use the base rate as an effective tool for controlling inflation, to an extent. By increasing the cost of borrowing people have less money to spend and therefore the demand for goods and services will decrease, and reduce inflation. The upshot however is that people are generally poorer.
An increase in lending costs can obviously be a big concern for people with debt, i.e. landlords with mortgages. In particular, anyone that is not on a fixed rate mortgage or who has a highly leveraged portfolio will be most at risk. This is one reason why at Asset Academy we teach how to pressure-test your investments to allow for such rises in the Bank of England base rate.
The other concern for landlords regards tenant’s and buyers affordability. If property prices increase, rental prices increase and living costs increase without wages increasing, many people may not be able to afford to buy or rent. This could result in voids or flips that cannot sell, costing the investor money. However, let’s take a look at what happens on the other side of the scale.
Is inflation good for landlords?
As we have seen, a rise in inflation will cause money to devalue. If you have savings in the bank this is obviously a bad thing because value of that money is decreasing. However, this also means that the value of any debt will also be decreasing. So if you have a mortgage, for example, although the base rate may rise the overall value of that debt will be reducing.
From this perspective inflation is bad if you have savings but good if you have debt. With rental properties in particular, the overall value of that property is not as much as a concern as the cashflow from that property. So the property may continue to produce rental income but the value of the debt on that property may in fact reduce.
Is inflation good or bad for property investors?
The answer to the question therefore is, it depends on your personal situation. The big factors that will be a concern are if your mortgage interest rate is variable or fixed and how leveraged your portfolio is. A highly leveraged portfolio is one where the money borrowed against the properties is close to the property’s valuation amount, normally over 85% of the value.
While some may attempt to forecast the economic future, it is speculation at best. Even the most experienced economists and minds at the Bank of England struggle to predict what may lay ahead and how inflation will change over the long term. For property investors it is therefore often best to keep your eyes on the road ahead and make educated and smart decisions with the knowledge you have today.