The global economy is dwindling amid hyperinflation, courtesy of the Russian invasion of Ukraine. Everyone’s focus was on a quick and robust recovery from COVID-19 before the present catastrophe. At that time, inflation was around 5% in the UK, but it rose to 10.1% in August 2022.
While the UK Central Bank predicts it will reach at least 15% by October, Citibank expects it to hit 18.6% by January 2023.
Consequently, most investors are worried and wondering if real estate is among the safest assets to invest in during stagflation. They want to know what happens to real estate during inflation to inform their investment decision. Well, this blog meticulously answered the question.
What is the Relationship between Inflation and the UK Housing Market in 2022
Both the UK and the USA housing markets have been hit by higher mortgage rates, higher taxes and more expensive energy which should drop house prices under normal circumstances. But the reverse is what the market presents. Thus, inflation and the UK housing market have a direct relationship in 2022.
This is likely caused by the high cost of building materials and housing shortages relative to the high demand in the rental market.
Data from the Office for National Statistics show that the market saw a 7.8% increase in average house prices over the year to June 2022. Prices and interest rates are not anticipated to significantly drop soon. The rise will likely continue to 2023 following the inflation trend.
What Happens to Real Estate During Inflation?
It’s normal for investors to enquire what happens to real estate during inflation or stagflation. Cartier, a Stessa Investment Strategist summarized the effect of inflation on real estate into these categories:
- Higher mortgage rate
- A general rise in property prices
- Higher cost of construction
- Increased rent
- Debt on already existing property is devalued
- Residential property performs better than others
Stock vs Real Estate During Inflation
Investment decision in an inflationary period is a choice between alternative opportunities like stock vs real estate during inflation. Investments with the highest potential returns get the bucks.
Cartier explained that apartment, retail, and office rents rise with inflation because they are tied to consumer prices. Increased construction cost, on the other hand, increases housing shortages and surges property prices. Investor, thus, gets higher returns on real estate investments during inflation.
But stocks and FOREX are more volatile in inflationary periods. The possibility of making a dead-end loss in stock prices during this period is higher.
Is Real Estate A Good Investment Now?
The best time to invest in real estate is subjective. It largely depends on an individual’s current financial position. Campisi posits that investors should be in a strong financial position considering their budget and needs. She also advised, ‘they shouldn’t make too many sacrifices to get a house to avoid buyer’s remorse and an expensive albatross to offload’.
Here are some reasons real estate is the safest asset to invest in during inflation:
- Property investment is a great hedge against inflation because of the resultant general rise in property prices, increased rent and devalued debt on the already built property.
- It is real and less volatile compared to other alternatives.
- Property value appreciates more quickly during inflation.
In times like this, it’s safer to have a diversified portfolio where more than 20% comprise property investment. Our team has the perfect strategy and walk-through to help investors get great returns during inflationary periods. Do let us know if you need to consult one of our experts for free.
Campisi, N. (2022, July 29). Housing market predictions 2022: when will price drop? Forbes. https://www.forbes.com/advisor/mortgages/real-estate/housing-market-predictions/
Cartier, B. (n.d). The effect of inflation on real estate investors. Stessa. https://www.stessa.com/blog/inflation-and-real-estate/
Ceri, L. (2022, August 17). UK House Price Index. Office for National Statistics. https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/housepriceindex/june2022.
Larry, E. (2022, June 8). UK to be major economy worst hit by Ukraine war, says OECD. The Guardian. https://www.theguardian.com/business/2022/jun/08/uk-to-be-major-economy-worst-hit-by-ukraine-war-says-oecd
Tom, B. (2022, July 28). With inflation running hot, real estate is a refuge. MYND. https://www.mynd.co/knowledge-center/what-happens-to-real-estate-during-inflation
Wion (2022, August 23). Citibank predicts 18.6% inflation for UK in January 2023 – UK cost of living crisis worsen. https://www.youtube.com/watch?v=unNEYNzAbKw