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Property Investment and Inflation

Inflation in the United Kingdom hit a high of 9.0% as of April 2022, an increase of 2.5% in a month and the highest since the 1970s. Inflation continues to have a knock-on effect on all aspects of our finances, including investments. How is the rising inflation affecting property investment, and what is the outlook for the future?

Property Investment Strategy

We are all feeling the impact of rising prices, from fuel to essential household items we buy every day. Inflation could rise to a high of 10% by the end of 2022, the Bank of England has recently warned. Needless to say, inflation has also had a negative impact on the investment and property markets. There are numerous reasons for the current rising inflation, including the current volatile global situation and an unusual surge in demand. The bad news is that if you have money in the bank, you are losing money as inflation rises. Experienced property investments focus on income-producing assets at times of inflation.

Having a solid strategy is key, especially before inflation continues to rise even further. One of the most widely implemented strategies is hedging. Essentially, hedging means that an investor takes steps in order to offset the risk that comes from a fluctuating and unstable market and is considered a vital part of a diversified portfolio.

Hedging is a risk management approach and is widely used for a variety of investments, such as commodities and stocks and bonds. For example, CFD traders often use a hedging strategy to protect their funds, offsetting a volatile market by calculating margins or trading on both rising and falling markets, as covered in this ‘what is CFD trading’ Skilling article that runs through the basics. CFDs are available for markets such as forex, commodities and shares among others, so investors have the ability to reduce risk through diversifying.

According to Savills UK Housing Market Update, “Investment in new buy to let properties remains strong”, stating that the number of loans granted in March was 50% higher than two years ago. Property investment is also considered highly desirable at the moment due to the increasing rental prices and extremely competitive market conditions.

Diversified Portfolio

The attraction of real estate investment in times of inflation is that it provides concrete portfolio diversification and long-term income. For example, after the crash of 2008, homes that plummeted in value eventually levelled off and then increased to pre-2008 value within less than 10 years. With continuing demand for housing, house prices rose by a further 1% in 2022 and continue to rise, going against predictions, in the face of increasing interest rates and inflation. As property values increase, so does rental income. As fixed rates mortgage repayments remain stable, it means there is a potential for higher profit margins.

Understanding the long-term impact of inflation is yet to be seen, but one thing is clear, holding on to cash is going to lose you money. Planning ahead and building a smart strategy for all your finances, including your property portfolio, is vital. It is essential to do plenty of research and understand all potential investment risks.