Yesterday, the Office of National Statistics (ONS) reported yet another rise in inflation, up 0.4 % from the previous month taking the figure to 4.4% and it’s unlikely that things will stop there. Andrew Sentence from the Bank of England advised that inflation “could easily rise above 5 per cent later this year”. So how do inflation rises affect property investors? Is this something we should be concerned about?
It really depends on how much actual cash you have to play with and whether you can afford the squeeze on your finances that an inflation rise implies. When inflation rises it means that the cost of living is higher – your food, utility, clothing and petrol costs are elevated, but it’s not only these daily necessities that are costing more. One of the main reasons that inflation is rising is because of the increase in VAT from 17.5% to 20%, which means that all the goods and services you buy when developing a property to sell on will cost you more.
From surveyors, plumbers, electricians and solicitors to paint, flooring and curtains will all cost 2.5% more than they did previously, if not more (when petrol prices go up goods and services tend to increase in price as well). Now that doesn’t sound a lot, but on a budget of £25k for a property upgrade including fees, where previously £4,375 of that amount would have been VAT it has now risen to £5,000. If you have several properties, the increase in costs for goods and services both from VAT rises and retailers putting up prices will be felt more sharply.
Add to that the high likelihood that inflation increases will lead to an increase in mortgage rates and you can see how your profit margin gets squeezed from all directions. David Kern, Chief Economist at the BCC, said, “It is likely that the MPC will look to restore its credibility and so we can expect interest rates to be raised in the next few months.”
So going back to the original question of how inflation rises affect property investors, we can see that if you have enough cash flow to pay more than you’re used to for goods and services and you can afford a % increase in your mortgage interest rates you will probably fair ok, though with lower profit margins. You will be able to claim these costs back in expenses when you come to filing your Tax Form. The difficulty is that you need to be able to swallow those costs for at least a year until you can claim the amounts back against your earnings.
So ultimately, the healthier your cash flow the better you will be able to manage inflation rises.
Two other important factors to consider when working out a properties’ investment potential and how inflation rises will affect you are factoring in rising rental incomes if you’re investing for buy to let and of course in the first instance, buying property as cheaply as you can.