Inflation and Rate Rises: A Market Update

Written on 17 November 2022 by Nicholas Mendes

Inflation and Rate Rises: A Market Update

Latest inflation figures from the ONS now put the cost of living to 11.1 in October up from 10.1% in September, increasing at its fastest rate in 41 years. Wages naturally aren’t keeping up in line with inflation and when we consider the average increase for those in the private and public-sector, real-time wages have fallen by an average 2.7%.

For private renters, ONS added rents increase by 3.8% over the year in October 2022 and the latest Hamptons monthly letting index saw average rent surpass the £1200 for the first time.

Inflation is affecting countries across the globe as we all face the same challenges – Part to do with Russia’s illegal invasion of Ukraine, but mainly down to the costs of energy, and shortage of goods and materials and high demand following COVID.
The traditional response to tackle inflation (BoE target is to keep inflation to 2%) is to increase interest rates, this encourages people to save and result in demand to fall.

Increasing interest rates also means those on tracker or Standard variable rates (SVR) are getting added pressure on their household expenditure. Some may argue that the BoE response to rate rises was too slow and should have adopted a more bullish approach.
One thing’s for certain is that latest increase to 3% is the highest level since 2008 and following on from the latest MPC notes we could be looking at a base rate closer to 4.5% rather than the 5% or 6% by the end of 2024.

Without getting political and pointing to anyone parties’ fiscal policy, events of September have unfortunately muddied the water in a time when stability in the markets was needed, events of which added to the pressure of homeowners coming out of there fixed deals. In short, the markets didn’t take to the previous government plans pushing up gilts, which affect SWAPS which lenders use to price fixed rates.

The good news is that the change in government has brought back a level of confidence and resulted in rate reductions in the last few weeks. Bringing some good news to those homeowners coming out of their fixed deal in 2023, who would have been quoted rates at 6% or more based on the previous regime, with fixed rates now looking on course to being closer to 4.5 to 5% next year.

Unfortunately, due to September’s drama the new government now needs to plug a black hole, and an increase in taxes and those who aspire to build a future through property are once again under the spotlight.

On the 16th of November, North Yorkshire council had approved a proposed rise for second homeowners to pay double the amount of council tax on properties in a bid to raise an extra £14m for social housing.
On the 10th of October, Scotland passed a bill to protect tenants hit by the costs of the living crises with a rent freeze until at lease the end of March 2023.

And most recently Sadiq Khan has continued to call on a 2-year private sector freeze in the capital. With small and professional landlords facing the same cost of living crises as we all are, they also face an increase in rates, continuous legislations change for tenants and the need to future proof properties to meet EPC requirements.

There seems to be a continuous oversite and lack of accountability at not looking at the bigger picture. For too long consecutive governments have not built enough property stock to meet demand. Targeting those that have aspired and achieved can only have a negative outcome.

Let’s take North Yorkshires proposals, because of the recent proposed rise for 2nd homeowners to pay double the amount of tax, this could result in properties to be converted to holiday lets which would then pay a lower rate of tax as a business, rather than council tax. Thus, exaggerating the problem of a lack of stock.

The proposed rent freeze in London, in a time when rates have doubled, and increased pressure of landlords could result in many choosing to sell properties. In the short term this would mean individuals owning a property, but longer term with a lack of stock in the capital this would only push up rents due to the lack of stock and the ever-increasing demand.

With elections coming around in 2024 and only a short period of time to win votes and confidence from the public, landlords I worry will continue to be made scape goats and will only result in more turning away and selling up, pushing rents up higher.
Governments need to realise that the private rental sector acts as an important if not vital part of the social housing sector fabric and one we shouldn’t take for granted.

Category: Nicholas Mendes