Inflation rose by more than expected – to 3% in January. The figure is already well above the Bank of England’s 2% target and is at its highest level in 10 months.
And the expectation is for inflation to rise further as higher energy costs take effect in April. Recently, the Bank of England forecast inflation would rise to around 3.7% by the third quarter of this year.
This comes against a backdrop of becalmed economy which would normally call for monetary stimulus in the form of sharp cuts to the bank rate.
But the Bank of England could pause because inflation sits stubbornly above its target. I'm afraid to say the forecast can be summed up in one word: stagflation.
Stagflation is a combination of stagnation and inflation. It’s a toxic mix of rising prices and falling growth.
Should your landlord clients be worried? Obviously, inflation increases maintenance and repair costs – as well as operational costs such as insurance and taxes.
Inflation can erode the real value of rental income over time, too. And if stagflation does need to be tackled, eventually, interest rates will have to rise.
That certainly sounds pretty bleak but, fortunately, the BTL space is relatively safe here.
First, even if stagflation did kick in, and the Bank had to increase the interest rate to bring down inflation, most landlords are somewhat protected through their fixed-rate products, at least temporarily.
By way of example, at Molo over 95% of our UK resident lending over the past 12 months is on fixed-rate products, with a bias towards five-year terms, while an increasing share of our international and expat borrowers are preferring to fix their rate.
Second, if the government chose to pull the spending lever to kick start GDP growth, landlords are likely to benefit.
We’ve already seen the economic stimulus of public sector pay increases of up to 5% for this financial year.
The government could go further; increasing public sector pay would stimulate demand and put money in the pockets of many tenants, boosting economic activity.
Or the government could OK some hefty infrastructure projects (third runway at Heathrow; building 50 small modular reactors) to drive up aggregate demand.
Third, BTL investment should fare better that the alternatives.
Rising prices can eat away at the value of pension pots, eroding the value of savings over the long-term. Those retirees with defined contribution savings who bought an annuity, for example, will see their real income fall in the face of inflation.
But inflation can also push rents up and property values. Furthermore, it also inflates away the real value of borrowing.
If you have an interest only loan for five years, and service the interest over that period, the real value of the capital sum you borrowed will fall. From that point of view, property investment represents a solid hedge against inflation.
Lastly, we know how resilient the sector is in the face of shocks like these. While BTL was in its infancy in the early 90s (when inflation was nearly 10%), it also rode the storm in October 2022, when inflation surged to 11.1%, marking a 41-year high).
Actions speak louder than words and the sector continues to thrive. The results speak for themselves.
