It may not stave-off recession, according to inflation data expert.
Annual inflation in the UK rose by 10.5% in December, but was down from the 10.7% recorded in November. Latest Consumer Price Index (CPI) figures from the Office for National Statistics (ONS) showed a dip in inflation for the second consecutive month after a four-decade high of 11.1% was posted in October.
ONS said the largest downward contribution to the change in CPI annual inflation rates between November and December 2022 came from transport, particularly motor fuels, followed by clothing and footwear, and recreation and culture. It also identified rising prices in restaurants and hotels, and food and non-alcoholic beverages as the largest, partially offsetting upward contributors.
However, the marginal decline in the rate of inflation may not be enough to keep the UK out of recession in 2023, according to Oliver Rust, head of product at independent inflation data aggregator Truflation. “Today’s inflation numbers from the Office for National Statistics, while nominally lower than last month, continue to paint an unpleasant picture for the UK economy, particularly when combined with wage and employment data released yesterday,” Rust said. “Both wage and employment data are flashing some worrying signals. As data continues to come in for 2022 and inflation comes under control, we should see wages start to catch up, however, the nominal increases will likely also decline. The UK is known for having low wages and high debt, and this will continue to be a headwind to economic growth.”
More base rate hikes coming
Rust added "that economic indicators and the Bank of England’s (BoE) historical track record would suggest a base rate increase of 25 basis points (bps) in February, though it seems plausible that another increase of 50 bps will be made, especially with inflation not coming down in earnest. Rising interest rates will put pressure on the housing market and, even with the cooling of interest rate increases in 2023, prices will likely start to fall this year, and then accelerate in 2024 before it gets better again. There is no sugar-coating it: it looks like it’s going to be another tough year for the UK economy,” he stressed. “Inflation looks set to remain high and is unlikely to return to the BoE’s 2% target anytime soon. This, combined with high-interest rates, wage declines, and rising unemployment, means the UK is probably progressing toward a recession – if it isn’t there already.”
What Does 2023 Have in Store for Property Investment in the UK?
Many people will be happy to see the back of 2022. I’m sure we’d all struggle to think of other years that saw similar levels of political and economic turbulence. The facts are well known to us all. Inflation soared into double digits. The Bank of England hiked the base rate from 0.1% to 3.5%. Russia and Ukraine went to war. The UK had three different Prime Ministers, four Chancellors, and a change of monarch. But despite all of this, 2022 was a strong year for the property market. In the 12 months to October, the average UK house price rose by 12.6%, according to the latest data from the ONS. What’s more, prices today are well above their pre-pandemic levels; between October 2019 and October 2022 the average house price increased from £232,919 to £296,422. More up-to-date house price indices have shown that the curve on the graph is plateauing or, in some places, starting to come back down. Speculation is rife on what prices will do this year – but when is it not?
House prices falling, but rents rising rapidly
Average house prices fell 1.5% between November and December, according to Halifax. Nationwide and Rightmove are showing similar trends. It means 2023 has begun with bold predictions. Some are predicting 10% will be wiped off residential property prices this year. But, crystal-ball gazing of this kind, whether positive or negative, must be taken with a pinch of salt. There are several questions that cannot be answered with any great certainly.
Most notably, will inflation fall significantly in the months to come?
If it does, the Bank of England’s interest rate hikes may stall, in turn ensuring borrowing remains more affordable for the masses. It is always very difficult to forecast where prices will go. What we can say with more certainty is that, while house prices are unlikely to increase in 2023, at least in the initial months, rents are on the rise. Across the UK, the average rent price rose by 10.8% in 2022.
Overseas investment in UK property
British property investors were spooked by what they saw in the 2nd half of 2022. Much was written about an ‘exodus’ of landlords from the BTL sector. Meanwhile, we saw withdrawals from UK commercial property funds gather pace in the autumn. This was all courtesy of the Government’s infamous mini-budget. But, while some may have panicked at home, overseas investors saw opportunity. As the value of the pound plummeted, foreign nationals swooped in to bag some bargains. Property investors from the US, Asia, and the UAE benefited from some incredible savings last year. In 2023, we may see more overseas capital flow into UK property – especially at the top end of London’s prime market. Specifically, this demand could be driven by the US, Europe, and the Middle East.
Lenders must be on hand to assist
However the market performs in the months to come, what is currently clear is the need for lenders to support brokers and borrowers. With inflation still in double digits, saving money remains challenging. Plus, the amount that buyers can borrow is decreasing as interest rates rise. Mortgages are getting too expensive for many. So, lenders must be on hand to assist. For instance, proactive communication can help brokers, buyers, and investors understand how financial products are changing as a result of the wider economy. They’ll need to know how this could affect their activity in the market. Furthermore, certainty will become more and more crucial. Brokers and borrowers can make better informed plans with the support of lenders that can explain their products and terms clearly and transparently. Starting the underwriting procedure early will protect borrowers from unpleasant surprises or unforeseen charges later on. This could lead to increasing buyer and investor confidence.
Finally, speed and adaptability are essential as always. More savvy lenders that are willing to take on challenging cases will come to the fore. Especially if other lenders start to remove products again, or stop accepting new applications. At MFS, we are making sure we can provide brokers and borrowers with products at speed, with flexibility and with a high level of certainty. The property market will undoubtedly face plenty of challenges in 2023, but there is still a wealth of opportunities to be had for investors. As such, finding the right lender, and the best financial option, will be key to success.
Three strategies for investors to see great returns in 2023
The current economic environment is still uncertain, and it is likely that the alarming rising cost of living, high inflation rates, and political instability will still be prevalent in 2023. Many investors or first-time investors are now questioning is now a good time to invest. To help answer this, we have devised three distinct investment strategies that can help to counteract this and enable investors to still experience increased earnings in the new year. By following the below strategies you can continue or start investing during this high inflation period.
Strategy One – Make Cash Investments During High Inflation
Making cash investments is one approach to building your investment portfolio during times of rising inflation. Given that mortgage interest rates are currently absurdly high, averaging approximately 6%, investing in cash alleviates this burden as you build your portfolio in the present UK economy. Cash investing during inflation makes your money work for you as the value of your property rises. In nominal terms, cash investments frequently keep up with inflation while short-term interest rates are rising. You may choose to keep the money in your bank account and watch as your purchasing power diminishes, or you could invest in a completed buy-to-let property with a mortgage, albeit both options will result in lower-than-anticipated profits. The best option would be to put the money in a high-yielding asset that will boost your portfolio and rental revenue.E
Strategy two – Off-Plan Investments
Off-plan properties are a great way to invest during high inflation periods. You can make your money work smarter for you and not be restricted by rising interest rates. Investors purchase an off-plan property during the construction part of the building process. It’s usually purchased at a discounted price to the actual value of the completed state. By investing in an appreciating asset, your money will grow whilst interest rates decline – this is done through off-plan investing during high inflation periods.
Why purchase off-plan?
A key incentive for investing off-plan during high inflation is the potential for attaining capital growth as the property grows in value over the build period. During that period of construction, the value of the investment, particularly in sought-after and up-and-coming areas, can grow substantially, this can mean exceptional growth before the property even completes. With this in mind, some investors choose to immediately put their property up for sale to make a profit. Click here to find out where the new thriving regeneration zones are in the UK. While this short-term strategy is ideal for investors looking to see returns quickly, investors will see much more capital appreciation by tenanting the property over a long-time period. Investors will benefit from the regular rental income in addition to increased value, by specifically choosing the right investment strategies during high inflation periods.
Should you purchase off-plan?
Whilst the buy-to-let sector works to navigate its way around the latest interest changes and rising inflation, a growing number of landlords who want to continue to invest are recognising the opportunity to be had by switching to off-plan property. Investing in a completed buy-to-let with interest rates of around 6%, means that your rental income will barely cover costs which could result in little to no profit.
Strategy three – Staycation Investments
The third strategy is investing in staycation properties, this combines strategies one and two. Investing in staycation properties during high inflation coincides with the rising cost of living and plays into the rising demand. In line with the times of COVID, frequent holidaymakers are forecast to shift to staycations rather than holidays overseas as a result of rising inflation and cost of living affecting budgets. As a result, staycation rentals are expected to be in high demand throughout 2023. Owning a short-term rental property now would be the best opportunity to take advantage of the increasing demand and higher rental revenue. A survey carried out by Go Outdoors noted 48% of British respondents said they will be more likely to travel domestically than internationally in 2023, with 56% of them citing “reduced budget due to the cost of living problem.” Additionally, due to the conflict in Ukraine, supply chains for jet fuel are now being affected, which raises demand and prices for travelling abroad. Since fewer Britons will now have the means to travel abroad, this will ultimately result in a rise in demand for short-term UK rentals for years to come.
Is it risky to invest during periods of high inflation?
Although some novice investors may question if it ‘is risky to invest during a recession or high inflation period’ but many will appreciate the stability the housing market has maintained through previous hardships, prior recessions, Brexit & Covid. Despite the recent economic downturn, the housing sector has performed well, and property values in the UK have increased rapidly due to the demand for property that far outweighs supply. The UK’s current housing shortage is dramatically driving demand in several areas, including Manchester, Birmingham, Liverpool, and London. This presents a fantastic opportunity for investors in the buy-to-let market. Even during times of high inflation, when households have less disposable cash, housing remains a necessity. Housing demand is not likely to decrease in the next 10 years – this was accelerated by the Covid-19 lockdown.
Every investment has some risk, and the level of that risk varies depending on the desired returns for the investor. Some investors may believe that excessive inflation adds risk when in reality, property is one of the best investments for investors to put their money into, particularly during an economic downturn. Long-term investing is about riding the wave of economic changes and ultimately coming out better off, even though parting with your money during challenging times can feel difficult- Long-term investments yield long-term results.
Summary
So, should you invest during high inflation periods? This response relies on your investment objectives; if you want to achieve long-term success, economic shifts shouldn’t stop you from investing; instead, just modify your strategies to overcome the challenges. By choosing strategy one, two or three, you can combat the rising interest rates and inflation and make your money work smarter for you!