Inflation could hurt housing market

Inflation could deal a double blow to the housing market, an agency expert warns.

Last week it was revealed that UK inflation had soared to a 30-year high of 5.4 per cent in the year to December thanks to rising energy costs, strong demand for goods and services, and ongoing supply chain disruption.

Jonathan Rolande from the National Association Of Property Buyers – representing quick buy companies – says the situation could be a double-whammy.

“Firstly, people will have a lot less in their pockets to spend. The rate at which prices are rising is at its highest since early 1992 thanks to increased food and fuel costs around the world. In the next few months energy bills could rise by another 50 per cent once the price cap is removed. 

“Potential first time property buyers won’t feel confident about taking a new financial commitment and will adopt a ‘wait and see’ approach, starving the market of buyers.

“The second blow could come from the Bank of England. They have limited ways of pushing down inflation and will have to resort to increasing interest rates as a way of leaving less money in people’s pockets. If they spend less, inflation will fall. 

“The trouble is that these price rises aren’t just on consumer goods that are a seen as a luxury – they are actual living expenses, many of which are simply unavoidable – who’d want to choose between food or water, heat or light? So interest rates could rise but inflation may not be curbed. 

“Might that lead to even higher rates? For the millions with a mortgage – or thinking about getting one – that could spell disaster. We need to watch these next three months very carefully.”

The latest monthly market report from the Home website says that only four English regions, plus Wales, show annual growth over and above the latest RPI inflation figure.

Home also warns that with RPI inflation – according to some analysts – heading for 10 per cent, “some regions are treading water while others are suffering significant price falls in real terms.”

Karen Noye, mortgage expert at business advisory service Quilter, warns:”Soaring inflation could well halt continuously rising house prices. While the Bank of England opted to raise rates to 0.25 per cent in December, it is unlikely they will be able to stop there if they wish to combat the steep rise in inflation we are witnessing, so further rate rises are expected.

“Highly inflated house prices coupled with elevated mortgage rates as a result of a further hike would make buying a home all the more unaffordable and could put off prospective home buyers.”

Meanwhile Sarah Coles, senior personal finance analyst at business consultancy Hargreaves Lansdown, shares the concern about interest rates.

“Any rise in mortgage rates would be a rise from a very low base, and there will still be some very attractive mortgage deals around. However, as we saw from the last few months of the stamp duty holiday, sometimes the idea of a change affects people’s buying decisions far more than the practical impact of the change itself. 

“Back in September, people were racing for a deadline that, at most, would save them £2,500. So there’s a risk that a rise to an interest rate as low as 0.5 per cent could make people think twice about stretching themselves to a more expensive property.”

Written by: Houseladder