Inflation and interest rate rises – what does it mean for real estate?

Inflation has risen to 5.1%, its highest rate in a decade, and this afternoon the Bank of England announced an interest rate rise from an historic low of 0.1% to 0.25%.

What does this mean for the economy and how will property be impacted? Flora Harley, partner, residential research and Simon Gammon, managing partner, Knight Frank Finance, comment on what we can expect from these changes.

“We are still in the midst of a global pandemic and the economic distortions are vast. Demand for goods has been supported by almost two years of excess savings, limited spending on services and with travel still disrupted any tourism spend, usually abroad, spending is being channelled into domestic tourism and goods.

“At a time when we are still reeling from base effects and a spike in fuel and energy prices, added to the global picture of strong demand, supply chains have been remarkably resilient but cannot keep pace.

“Providing the Omicron variant does not spark a new lockdown, in 2022 we will see more spending in services. The Bank of England's decision to raise the base rate to 0.25% signals to the market that they will act when necessary and should restore faith. Given the messaging from the Federal Reserve that they will speed up their tapering and expect up to three rate hikes in 2022, it is likely the Bank of England’s base rate will be 1% by the end of 2022.” Said Flora.

Flora urges caution as disruptions will remain into the new year, she added: “There is one thing I note over the past week, however. The retiring of the word transitory is not because inflation is not indeed transitory – but that there is misinterpretation. The notion is that we are not seeing a sustained shift to higher inflation, rather than it would pass in a matter of months. Yes, it may be higher and more volatile than the past decade, but that was an outlier, and as stated, we are still in a period of significant disruption and the true path will not be clear for a while yet.”

Mortgage interest rates

Simon believes now is the time for borrowers to strike in order to secure the best possible mortgage deal: “By raising the base rate it’s clear that the Bank of England believes the economy will shrug off most of the effects of Omicron. Getting a grip on rising inflation appears to be the number one priority. Mortgage rates on the high street have been edging upwards during recent weeks in anticipation of this moment and it’s clear the lenders believe there could be at least one more hike in the base rate next year.

“Though mortgage rates have been rising, they remain very competitive by historic standards. Our advice to borrowers is to get an offer locked in now. Offers are typically valid for six months and can easily be amended, should it be possible to lock in a more favourable deal at a later date.”