What happens to house prices during inflation?

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In the UK, there is a lot that goes on when it comes to pricing property. One of the biggest factors is the inflation rate at the current time. This economic factor impacts house prices but to what extent? 

As a landlord or property manager, this is an important thing to understand so you can make the best investment decisions. No matter what size of your portfolio, it is vital you read this article in detail and at least understand the basics.

So, starting with what exactly inflation is, to how it impacts house prices, to whether house prices are a smart asset to have, read on to get informed with all the details.

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What exactly is inflation?

Inflation is the term to describe the process of the cost of items rising. It can refer to the general price of everyday items or it can refer to individual categories of spending.

For example, the general price of inflation that should occur on average is 2% every year in the UK. Nonetheless, inflation has been far more than this 2% figure and it has also been lower.

There is typically a cyclical process of inflation rate rising, reduced spending due to combat inflation, which then drives down demand and prices adjust before buying picks back up and inflation increases again.

This is sometimes referred to as economic cycles and gives the name of a “buyer’s market” or a “seller’s market”, especially when it comes to house prices and the impact of inflation on real estate.

What causes inflation to occur?

Inflation is sometimes referred to as the overall increase in price or the cost of living and is usually as a result of a few different factors including demand, supply and inflation expectations.

In other words, the supply of products in the marketplace, increase in buying power through demand and the expected price change in the future also influences how people buy. And the inflation rate.

For more on how this may work, click here for an explanation.

Predicted inflation rate after 2020

As a modern day example, we can look at the inflation rate after 2020. The rapid printing of money in the UK throughout the pandemic due to furlough and to help fund vital services caused more money to be printed and put into supply.

As a result, there was a bigger increase in spending and an increased demand in supply. Inflation therefore went down to 0.85% as loans were able to be taken out relatively cheaply.

However, after this mass spending, the inflation rate went back up to around 10%. Banks raised their base rate which resulted in debt becoming more expensive. This was in an effort to reduce spending and inflation.

It is not predicted for inflation rate to come back down to normal levels (around 2%) until 2025.


Graph of predicted inflation after 2020

Will inflation ever stop and will there be deflation?

A reversed inflation rate can occur. However, despite inflation being associated with negativity and a poorly performing economy, depreciation is representative of a recession. It would be better if there was a healthy, 1-3% inflation rate.

Anything extreme such as an inflation rate that is above 5% or a deflation rate is where banks start to have to change their base rate by quite a bit to increase spending or decrease spending accordingly.

For more on how deflation is in fact worse than rising inflation rate as it is indicative of a recession, click here for an article by Forbes that explains it in more detail.

If inflation goes up, does this impact house prices?

So, now you have gained an understanding of what inflation is, to answer the question of if inflation impacts house prices, you may be able to work out that it does and quite predictably.

As inflation goes up, house prices tend to stagnate or decrease in value. On the other hand, as inflation goes down, house prices tend to go up.

This is because lower inflation rates are associated with more affordable mortgage rates as the bank of england base rate is set to combat inflation and lower inflation causes a lower base rate.

As loans become easier to take out, the general higher buying power in the general market causes a lot of competition dn house price owners are able to get away with charging higher prices.

When inflation is the lowest, it would be common for a house to be listed on the open market and continually go up in value over time as more people put in offers and are willing to pay more.

On top of this, the mortgage interest rate becomes more affordable for buyers. Instead of a mortgage being 6% – 8% which is an interest rate typical of an economy with a high inflation rate, mortgages become available for 1% – 2%.

For instance, a buyer that is trying to buy a property with a 6% interest rate will have a harder time gaining approval for a mortgage than if the interest rate was around 2%.

If they were trying to buy a buy to let property for example, the rental yield would have to be significantly more in the 6% interest rate example. There is a limit to how much rents can increase so many deals simply do not make sense financially.

Hence, mortgage application approvals drop and so do house purchases, decreasing spending and hence the price of homes as there is less demand.

This decrease in house price is what the intention would be in the first place to combat the higher house prices due to inflation. In this way economies are cyclical and follow this process fairly predictably.

How much has inflation has gone up after 2020?

Following the pandemic, there has been a lot of inflation. Following this, the Bank of England base rate has increased to reduce spending and bring down house prices. 

Graph showing how much inflation has gone up

Does higher inflation help buyers or sellers?

The value of homes goes up when inflation is highest. This means inflation really is in the advantage of a seller. They can find the highest price for their property which would be a lot less in an economy with a lower inflation rate.

Nonetheless, property deals should be considered on a case by case basis and buyers can still certainly find a deal that they can make money on if they correctly consider the investment.

Typically, in order to make the most money, investors should have a good strategy no matter what the market is doing. This could mean transitioning between buying and selling at the right time or purchasing a lower cost, terraced house rather than a more expensive one during times of higher inflation rates.

Other strategies also include making sure you lock in the right interest rate on a mortgage while they are favourable. For example, going for a long term mortgage and locking in a low rate while inflation is low would be ideal.

On the other hand, if you have to buy a property during times of high interest rates and high inflation, then going for a shorter term mortgage and refinancing as soon as interest rates come down would be a great method

Should you sell during inflation?

It would be a good idea to sell during an inflation to take advantage of the inflated property prices. However, it all depends on your investment strategy. If it is to buy and hold, then simply holding off on buying during times of inflation where there are high prices would also be a good strategy.

How can you take advantage of inflation as a buyer?

In order to take advantage of inflation as a buyer, make sure you have money in an asset that is appreciating. This is the best way to combat inflation.

Property is the most common asset to do this in as it rises and falls with the inflation in the economy fairly predictably.

How this works is a buyer would keep their money in property by buying in when property prices are low but the mortgage interest rates are also low, then the buyer remortgages a property when prices are highest to “lock in” the price of the asset. However, this is often done on an unencumbered property.

This means investors can make some money on their investment and the money they do make hedges against inflation. For example if a buyer makes 10% on their money from buying a house to remortgaging it.

This 10% should be more than enough to cover the 2% inflation that is the average inflation rate for the last 20 years. However, most buyer will make a loss in the worst economies such as that of 2022 where inflation was 10% – 11%.

Do variable rate mortgages inspire lower prices?

A variable rate mortgage or a standard variable rate mortgage (SVR) is where the interest rate on the mortgage changes over time. For example, if a lender decides to raise the interest on an interest only buy to let mortgage.

This usually happens after the fixed interest term of a mortgage comes to an end. This would mean the buyer would have to start paying more for their mortgage without paying off the equity of the mortgage any sooner.

Mortgage rates on a post it note

This means the lender is charging more for their mortgage repayments and would therefore drive up the price of property as buyers look to make their money back to cover these additional payments.

On top of this, a higher interest SVR mortgage is typical of an economy where there is a lot of inflation and the Bank of England is trying to bring this inflation rate down.

Does the value of a mortgage decrease over time?

Because of inflation, sometimes mortgages are described as going down in value over time. 

For example, if you buy a house with a 30 year mortgage that has to be paid at £400 every month, the last mortgage payment on year 30 will be worth a lot less in value than in year on due to inflation.

With the assumption that inflation remind 2% every year on average throughout this time period, yo could use the formula £400 * (1 + 0.02)^30 to work out that the same mortgage taken out in 30 years would cost you £1080 accounting for inflation.

In this way, mortgages that have been going on for many years are “priced in” and the payment on them would be worth a lot more if the same mortgage would be taken out in the current moment.

How can you take advantage of inflation as a seller?

To take advantage of inflation as a seller, much like a buyer, you should focus on timing the sale of the price of a house just before inflation gets too high to get the best deal.

This is because there is a lot of buyer demand at this time and it is likely someone will pay more.

If you compare the sale of the same property in a market where mortgage interest rates are higher, this would produce a different result. 

However, house prices are fairly robust and don’t fluctuate as much mortgage interest rates. This means there is less of an advantage to gain as a seller and it is more about waiting to get the best deals and sell for the right price.

Is housing a smart asset to have during inflation?

Housing is a smart investment to have during inflation because house value typically appreciates with inflation and the rental demand also goes up over time. This means the investment can be protected from inflation no matter if the house is linked detached or any other class of housing..

For example, in a year of higher inflation where inflation is up to 5%, if a buyer makes 5% or more back on the rental income of a property on their return on investment, they would be able to say that the asset is a safe hedge against inflation.

Nonetheless, property isn’t completely safe against inflation as you still need the right methods to benefit from property as an asset and there is still the chance you could lose money from factors outside of you control.

How can you diversify your property portfolio?

You can diversify your property portfolio by investing in different asset classes.

As A property portfolio is diversified, it becomes less risky as a portfolio. This is because different asset classes carry different amounts of risk. As an example, during 2020, there was a shift in the demand for commercial office space compared to houses. 

If you owned only commercial office space, you would have likely sold or rented at a loss. However, if you owned a mix of different types of property, you would carry less risk.

When it comes to inflation, different types of property could get affected differently and at different times so it is a good idea to diversify.

A diversified property portfolio to hedge against inflation

Are localised property markets different to the rest of the UK?

While there is a general trend in the property world, there are also localised marketplaces where there are different supplies and demand for buying and renting and this in turn makes some areas more desirable to hedge against inflation.

For example, inflation could be mitigated against more effectively in an area where there is a higher property appreciation compared to rental yield if the owner doesn’t make rental income a priority.

For instance a property owner in Chelsea, London would likely buy a house that is £1 million or more but have a low rental yield of only 1% or so if they were to rent it out. Thi is okay because the appreciation is worth it.

On the other hand, somewhere in the UK like Sheffield has a low property appreciation but a higher rental yield of around 10%. This means the property owner can still make their money back from inflation but it is through rent instead of buying and selling.

Ideally, someone looking to invest would want a mix of both rental yield and property appreciation but it all depends on the individual’s investment strategy. Nonetheless, property appreciation is certainly a more reliable, straightforward strategy for getting rid of inflation 

In conclusion

All in all, house prices are definitely affected by inflation and the more you research property the more you realise this process is very cyclical in nature. With the right knowledge, it is very realistic to take advantage of this.

Couple this knowledge with the individual housing market for the local area and your own tolerance for risk and consider your own investment strategy as an investor for best results.

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Donnell Bailey

Property expert

Donnell is a property expert focusing on the property market, he looks at a combination of legislation, information from property managers, letting agents and market trends to produce information to help landlords.


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