Is it Better to Rent or Buy During a Period of Rising Inflation?

Thanks to a combination of world events, inflation in the UK has recently soared past the 10% mark for only the fourth time in seventy years. According to Bank of England projections, the figure is set to peak at 13% in October – but we should be aware that past projections have been continually revised in only one direction: upward.

As such, it would be a brave person that bets on 13% being as bad as things get.

So, what does this mean for the property market? If you’re planning on making a switch to a new home, then you might be wondering whether it’s a good idea to rent now or to buy.

What does Inflation mean for the Property Market?

House prices in the UK have been rising well beyond inflation since the global financial crisis in 2008. Traditionally, the property is perceived as a ‘hedge’ against inflation. While the value of the cash in your pocket might be dwindling every day, the same isn’t true for the house that you live in. 

We should, however, consider a few factors. The first is that, in response to the crisis, the Bank of England is likely to push its base rate of interest higher. This is bad news if you’re on a variable-rate mortgage, as it means that the amount you pay every month will rise, too. 

On the other hand, the real value of your mortgage will be pushed down by inflation. After all, if you borrow a few hundred thousand pounds to buy your home, then the debt will remain constant even after twenty years – even if the value of those few hundred thousand pounds is pushed down. As such, the mortgage might become cheaper in real terms, even after interest is factored in.

We should consider that, when interest rates rise, the cost of a mortgage goes up. This means that there will be fewer buyers available to purchase any given property. This will mean that the value of that property stops spiralling. In June, the rate of inflation for house prices slowed from 12.8% to 7.8% year on year. 

Renting or buying: which is better?

Given all of this, what’s the best choice for your property needs? The answer will depend on your circumstances. Renting tends to involve less hassle and more flexibility – but the money you spend isn’t going to build any equity over the long term. After you spend a few decades renting, you won’t be the owner of the property you live in. On the other hand, you’ll be liable for any repairs and maintenance if you decide that you’d like to buy a property outright. Bear in mind also that much of the risk you assume as a renter can be dealt with by investing in renter’s insurance from a reputable provider.

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