Ralph James

Letting up: could rising inflation spell good news for landlords?

Everyone’s talking about inflation right now, and usually in negative terms. 

The current climate of rising prices is affecting us all, from filling up the car to doing the weekly shop. There’s also plenty of news about tenants and buyers feeling the squeeze, but what about landlords?

Reduced tax allowances and rising interest rates are affecting monthly profits, and you might be wondering whether buy-to-let is still a viable business.

While today is nothing like when inflation hit 25% in the 1970s, or when mortgage rates breached 15% in the 1990s, those numbers aren’t very useful for making decisions now.

Nonetheless, there are some lessons to learn from previous times of uncertainty, not least that growing your business and income can be far more profitable than simply cutting your losses.

As a landlord, you want your rental portfolio to thrive and give you a passive income into retirement, regardless of economic ups and downs. With that in mind, this week’s blog explores how rising inflation can work to your advantage.

How does inflation affect our daily lives?

None of us minds our income increasing, and we all accept that prices don’t stay the same forever. So inflation in itself isn’t a bad thing, unless it reduces our spending power.

The current energy and fuel crisis is making everything more expensive to produce and transport. Meanwhile, supply chain issues, the worldwide grain shortage and high consumer demand are pushing up the price of goods and services.

This all boils down to the pound in your pocket being worth less each day, and that cash isn’t king right now. Your money needs to work harder to be worth the same or more, which means finding assets that have a history of high performance.

Even with the Bank of England raising interest rates to cool the economy, savings accounts currently only pay around half the rate of inflation.

So investors look elsewhere to grow their wealth,
and that’s why landlords choose the safety and proven track record of property.

How does inflation affect mortgages & debt?

If you have a cheap buy-to-let mortgage ending soon, or you’re looking to get a mortgage on a rental property, rising interest rates mean smaller loan-to-value offers. That’s because stress tests by lenders require the monthly rental income to be 145% of the mortgage repayment.

However, what often gets missed, is how inflation causes the value of capital debt to drop in real terms over time. Most buy-to-let mortgages are interest-only, and here’s what happens to a £200,000 interest-only mortgage over its first ten years at different inflation rates:

  • At 0% inflation, the debt still has the same value in real terms of £200,000 
  • At the Bank of England’s target inflation rate of 2%, the value of the debt in real terms drops to £164,070 
  • At today’s 10% inflation rate, the value of the debt in real terms falls to just £77,109

This shrinking of the debt in real terms is made even more profitable by the inflation-beating history of house prices. And while interest rates are no longer at historic lows, they’re still way below inflation and cheaper than they’ve been for most of the last 70 years. 

How does inflation affect property prices & rents?

You don’t need to be an economist to know that property prices have left the Consumer Price Index trailing in their wake. There’s simply no longer a connection, and the demand of the last couple of years has seen record rises.

However, any reported fall in prices causes buyers to hesitate, and October’s small drop was accompanied by Rightmove and Zoopla reporting reduced demand. And whenever fewer people are looking to buy, one thing’s for sure: more tenants looking for a home to rent.

History tells us how this plays out:

  • Landlords have less competition when looking for rental homes to buy.
  • Sellers become more flexible on price.
  • The simple rule of supply and demand pushes rents and yields higher.

Before you ask: no, we haven’t forgotten the increased cost of living. So if your rental property will be empty soon, or you wish to expand your portfolio, take a look at our previous blog on how to attract high-earning professional tenants with plenty of disposable income

How does inflation affect savings and investments?

As properties fell in value during the recessions of the 1990s and 2000s, landlords swooped in to scoop them up. That’s because bricks and mortar is a unique type of investment – what other asset lets you tweak and upgrade as the market evolves and is always in demand?

If you’re wondering where to put your money, here are some of the differences between savings, shares and property:

  • Savings accounts are ideal for a rainy-day safety net, but your money will reduce in value if the interest rate is lower than the rate of inflation, like now.
  • Shares can offer exhilarating returns in times of high inflation, but they are extremely volatile, and companies can be wiped out alarmingly fast if the economy dips.
  • Property can fluctuate in value, but it’s far less volatile than the stock market: it can’t simply disappear overnight, and having a home is everybody’s priority number one.

For every investor, it’s a matter of weighing up what feels right for you between risk, return and stability. Most of our landlords invest in property because of the way it balances all three.

How does inflation affect landlords’ costs?

Everything gets more expensive when inflation increases, from labour and services to goods and materials. So it’s a wise precaution to review your rental property for any upcoming expenses to see if you can deal with them now before the costs go up. 

Things to look out for include: 

  • minor repairs that could turn into bigger and costlier problems
  • essential maintenance works and safety checks for gas, electricity and smoke alarms
  • plans for upgrades, including appliances, fittings, redecoration or refurbishment
  • insurance policies for the building, your contents, legal cover and rent protection.

Depending on your property and plans, the savings can seriously mount up by taking a proactive approach and getting ahead of further price rises.

Regardless of economic climates, demand for rental homes consistently exceeds supply and assures their status as long-term investments. 

If you’re a landlord in Surrey and you’d like some advice on the best homes to invest in, or the best upgrades to make, why not get in touch? Call our expert Sam on 01306 284 555 or email us at info@ralphjames.co.uk.

We’d love to help you build a valuable, sustainable and profitable portfolio.

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