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How are property investors affected by rising interest rates and inflation?

Rising interest rates and inflation have been one of the major UK economic trends of 2022, and all indications are that this will continue into the next year. With this in mind, many people have been wondering how it will affect UK housing – in particular, whether it is a good idea to continue investing.

To help answer some of the most common questions property investors have about the UK market, rising interest rates and inflation, we have produced this Q&A with Ronald Garrett, the Managing Director of Alliance Investments.

Will higher interest rates affect the housing market negatively?

This is a complex question without an easy answer. On the surface there appears to be some negative effects for investors including higher mortgage costs and a potential fall in house prices in response.

However, when you look a little deeper it is clear that the picture is actually a lot more positive. House prices remain at all time highs, and demand continues to soar. Higher interest rates can affect the availability of new mortgages, but this opens up more opportunities for cash buyers who can move faster and get better value by avoiding this interest rise.

In addition, reports in the BBC at the end of November 2022 show that interest rates for five-year fixed mortgages have fallen below 6% again. This is a positive sign and could be viewed as a return to normalcy which bodes well for the future.

Overall, the UK housing market remains extremely strong. Demand is higher than ever and the available supply remains low. New construction continues to lag behind what is needed and creates the conditions for long-term growth which investors need.

Can we expect to see more tougher property investment conditions with the latest rise?

It is fair to say that the increased cost of living and the aforementioned high interest rates on mortgages could put some people off. These are tougher times for many and some investors might see more stringent conditions which prevent them from growing their portfolios as quickly as they would like.

As mentioned previously, this opens up a chance for cash buyers to make gains as they do not need to be concerned with rising mortgage rates. It also means that off-plan property is a more valuable asset than ever before.

With these properties, you pay at the point of completion. This could be many years ahead of us and means that by the time they complete, market conditions are likely to have returned to a more normal level. In this way, you can lock in capital appreciation that grows over the course of construction, and at the same time you will put off making the final payment or mortgage application until years down the line potentially.

Buying off-plan could give you the best of both worlds in the current market and help alleviate any financial concerns during a tough time while ensuring you still benefit from strong returns.

Could inflation be good for property investors?

The short answer is yes, it is very possible that rising inflation could benefit property investors. This is because house prices rise along with everything else, but as long as interest rates don’t follow at the same rate, you will not be paying more than what you originally borrowed.

This means that your potential capital appreciation increases in the same way that it does in normal times – and your profit margin grows.

Investors using cash to make their purchase will be enjoy an even greater potential for profit as inflation pushes house prices up. These investors will not have any repayments at all and will get the full value of capital appreciation without any deductions.

What could the UK property market look like in 2023?

It is true that there has been some discussion of falling house prices, but it must be considered in context as with everything else. In many cases, it simply means that house prices are growing at a slightly slower rate than before rather than falling outright. Given that we have been experiencing historic rates of growth, a small correction is not the end of the world and is even likely to benefit the market – and therefore investors – in the long run.

Overall, it is hard to predict exactly what will happen to the UK housing market in 2023. However, the fall of interest rates back below 6% as referenced previously is perhaps a sign that we can expect a slow return to business as usual. As always, how it will fare for you personally will depend on where you buy.

The latest HomeLet Rental Index shows that every region in the UK has seen monthly and annual rental growth – at an average of 1.4% and 9.2% respectively.

Some regions are performing even better than that average. For example, the North West region, which contains property investment favourites like Preston and Manchester, has seen the average rent increase by 9.8% in the last 12 months according to HomeLet. This follows reports from earlier in 2022 that Manchester’s average rent had risen by a huge 23.4% in a year.