Cooldowns and stagflation: What’s next for property?

Property inflation has been in double digits for 11 consecutive months¹. April saw a further rise of 12.1 per cent, although this was in fact a slight slowdown from March when asking prices for British houses recorded a jump of 14.3 per cent – the sharpest leap seen since 2004. As a result, the average home is now a fifth more expensive than it was at the start of the pandemic². 

House prices are currently still being pushed by robust demand and limited supply, which was triggered by the now infamous ‘race for space’ as people, mostly city-dwellers, sought after larger homes and gardens. 

“Since the start of the pandemic, we’ve seen a number of our clients capitalising on this demand and achieving higher than expected sales prices for their properties,” says Helena Bonsu, Managing Director, Head of Credit Advisory, HSBC Private Banking (UK & Channel Islands). 

“We’ve also seen increased interest in properties with more open space, but with good transport links, and usually still within touching distance of London. For some purchasers, that’s meant a wholesale shift to the country, whereas others are hedging their bets and retaining property in the city as well. 

“A number of our clients found themselves in competitive tenders to secure their dream home, where a key differentiator became our ability to move at speed, and enabled them to set their offer apart in a ’hot’ market.”

But is a cooldown on the cards?

House prices and sales are, however, expected to slow down, owing to the squeeze soon to be felt by households around the country. A recent YouGov survey also shows UK attitudes towards property are changing, with 54 per cent of homeowners stating that they would be happy if their property didn’t rise in value in the next ten years - if it meant that more people could purchase their first home. 

Since 2000, the cost of the average home has increased by a remarkable 224 per cent, prompting all demographics to support reforms to make the market more accessible³. 

The unfolding economic situation in the UK suggests a cooldown in prices may be on the horizon, prompting questions over whether investors, buyers and developers should play a waiting game with interest rates, or make a move before stagflationary impacts appear. 

However, property developer Bellway has said that the profits of housebuilders most likely won’t be impacted by steeply rising inflation, owing to the fact that property prices are increasing at an even sharper rate. In spite of particular building material costs spiralling and an increase in wages, Bellway announced that its operating margin had increased from 17.3 per cent in January 2021 to 18.7 per cent this year⁴.

How would stagflation impact the market?  

At its core, stagflation means high inflation combined with restrained GDP growth, which is why interest rates are being increased, to slow the path. Inflation hit a three-decade high of 6.2 per cent in February, and the Bank of England has said it could climb to 10 per cent later this year⁵. 

A look back at the historical context shows why this is momentous: UK inflation peaked at 27 per cent in 1975 (which, coupled with high unemployment, led to stagflation), remained at just over 20 per cent in the early 1980s and 11 per cent in the early 1990s. Since then, inflation hasn’t even come close to double digits⁶, until now. 

The recent increase in the Bank of England interest rate from 0.75 per cent to 1 per cent on 5 May puts rates at their highest level in 13 years. The hike adds further pressure to living standards and is likely to fuel additional base rate rises later this year. What does all of this mean, especially if stagflation revisits the UK for the first time since the 1970s? 

The interest rate increase will push the costs of mortgages up, dampening appetites or even ability to buy. It inevitably impacts first-time homebuyers more keenly than existing homeowners and developers. Rising construction costs combined with economic deceleration would mean fewer and increasingly expensive new homes on the market. 

Forecasts predict that in 2023, prices will fall by 3 per cent, followed by a further 1.8 per cent drop in 2024, wiping out some of the near 20 per cent gains made since the start of the pandemic⁷. Although caution and a keen eye on the market is advised, for the time being, predictions of stagflation remain just that – predictions. 

A stagflationary and high interest environment tends to favour companies that are essential to everyday life⁸. Energy and material sector preferences also tend to serve as a hedge to stagflationary forces. 

Crucially, investors should keep front of mind that a well-thought through portfolio should, long-term, weather most storms. Investors should also resist the urge to make spur of the moment changes during turbulent times. A resilient and diversified portfolio is key. 

Keep up to date with our investment house views and Investment Outlook for the latest views and updates on portfolio approaches.

¹ https://www.thisismoney.co.uk/money/mortgageshome/article-10766287/House-prices-rise-12-despite-cost-living-pressures.html ↩

² https://www.theguardian.com/business/2022/mar/31/uk-house-prices-grow-at-fastest-rate-for-17-years ↩

³ https://www.newstatesman.com/business/2022/04/britain-has-fallen-out-of-love-with-its-housing-market ↩

⁴ https://www.ft.com/content/a99c0f0a-fc1b-4a3e-b77b-65d7b29cfeb0 ↩

⁵ https://www.theweek.co.uk/business/economy/952634/how-high-could-uk-inflation-rise ↩

⁶ https://www.theguardian.com/business/2022/jan/19/blame-covid-why-uk-inflation-is-at-its-highest-for-30-years ↩

⁷ https://www.thisismoney.co.uk/money/mortgageshome/article-10763373/House-prices-start-FALL-year-drop-5-end-2024.html ↩

⁸ https://www.thetimes.co.uk/article/how-to-invest-your-way-out-of-stagflation-xmsq3gwfl ↩