The latest Consumer Price Index (CPI) from the Office for National Statistics (ONS), released on 15 February, revealed inflation slowed down for the third month in a row in the UK.

Prices rose 10.1% in January, down 0.4% when compared to the 10.5% inflation rate in December.

Despite this slight decline in overall inflation, food prices remain at a 45-year high, while regular pay – when adjusted for inflation – fell by 2.5% in real terms in Q4 2022.

As such, when combined with rising interest rates, this level of inflation is still having an impact on how consumers, businesses and investors are managing their finances.

Indeed, inflation is impacting the UK property market as well.

House prices have softened, but the market is stabilising

As the cost of living rises, people have less money in their pockets. Therefore, by and large, they are more careful about how, and on what, they spend their money.

Consequently, there has been a decline in buyer demand in the UK property market in recent months.

In January, for example, data from the Royal Institution of Chartered Surveyors (RICS) showed a net decline of 47% in new buyer inquiries, while new listings also fell by 14%.

As demand cooled, house prices also softened in recent months. Indeed, statistics from the ONS, released on the same day as the CPI, revealed that while average UK house prices increased by 9.8% in the 12 months to December 2022, they had fallen in value slightly (£2,000) in the final month of last year.

Other indices are showing similar plateauing or declines in prices.

With inflation having so much of an impact on the property market, some fear that prices could fall by as much as 10%.

However, the main driver of the current rate of inflation – energy costs – have started to decline for producers.

In fact, wholesale energy is now cheaper than it has been for a year and a half.

As such, should the reduction in wholesale costs be passed on to consumers, we could see a sharp decline in inflation throughout 2023.

The Bank of England (BoE) is confident of a rapid drop in costs come the summer.

Inflation may have peaked, but the Bank of England may hike the base rate again

Nevertheless, the BoE has not strayed from its plans to grind inflation into the ground, using higher interest rates to influence spending habits.

Policy makers are suggesting the base rate will be hiked again in March, likely by 25 base points, taking the base rate to 4.25% and marking the 11th consecutive interest rate hike since December 2021.

For some economists, however, this is touted to be the last hike for some time, and should provide some optimism for the UK property market.

If these predictions prove correct, and inflation drops sharply while interest rate hikes are paused, the market should attain some much-needed stability.

For lenders, this stability will allow them to evaluate rates and act with greater certainty.

Fixed-rate mortgages, for example, have seen a gradual fall in recent weeks because the market has priced in further interest rate changes.

In turn, this could support demand and activity in the property market.

So too may the cuts to stamp duty, which remains one of the few policies to survive Kwasi Kwarteng’s ill-fated 38 days as Chancellor.

This tax cut, which should allow 200,000 more people a year to afford to buy a house, will also help the property market adjust to the ‘new normal’ of increased interest rates.

Consequently, recent analysis suggests that the worst of the property market’s downturn could be over, while house prices should not drop by anything more than 5%.

Lenders can help the market bounce back

Even though house price growth has paused temporarily, there are still opportunities for landlords, investors, and brokers to capitalise on.

Lenders must be there to help property investors access these opportunities.

Buy-to-let (BTL) investments, for example, are still in high demand. Indeed, while house prices are falling, rental prices are growing at their fastest rate since comparable records began seven years ago.

However, brokers working with BTL investors will require a healthy dose of flexibility from lenders; and the specialist finance sector will have a key role to play here.

From BTL mortgages to bridging loans, an ability to work with landlords that present complex challenges can make a huge difference.

At Market Financial Solutions, our wide range of products not only boasts a great deal of flexibility, but we also pride ourselves on taking a proactive approach to overcoming any challenges we encounter with an application.

With more than 15 years’ experience as a specialist lender, our flexible products and ‘can do’ attitude means we are primed to drive further growth across the property market in the months to come.

Blog Post from Property Notify

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