Inflation – A Landlords’ Saviour
I confess I’m old enough to remember the 70’s – the flares – discos – the collars
and above everything else – INFLATION.
But not just the paltry 2 or 3 % inflation of recent year but proper double digit inflation of the type that meant that the price of a Marathon went from 2 pence to 2 and a half pence overnight. In fact after the oil shock of 1973 when the price of oil quadrupled (any similarities here with our current economic woes?) inflation remained in double figures for the rest of the decade hitting an annual high of 24% in 1975.
Inflation is on the way back
The Consumer Price Index is now rising at 3.3% (1.3% above the official target of 2%) and the Retail Price Index (excluding mortgage interest bills) at 4.4% (not far off 2% above its old 2.5% target).
However, most of us think these figures underestimate what is really going on. Majestic the wine merchant warned that wine prices might have to rise by 10% to cover the costs of transport and the rising euro and that even the price of bananas is set to jump by 8%.
Much of this inflation is coming from abroad in the form of rising fuel and food prices. The Economist survey of 55 countries showed that 12 have double digit inflation rates.
Inflation good or bad for landlords?
Most economists say that inflation is bad for economies. Look at what is happening with Zimbabwe where you need a barrow load of cash just to buy a loaf of bread from the local market. The lack of stable prices makes economic decisions by consumers and businesses difficult if not impossible.
Landlords suffer from rising costs and prices just as any consumer does. In recent years landlords have been on the receiving end of massive labour price inflation as skill shortages have propelled the cost of using all the trades: plumbers , builders and decorators ever higher.
Other costs such as accountancy and buy-to-let insurance rates continue to climb.
Where do professional landlords go for their buy-to-let insurance?
The one big upside of inflation for landlords though is that as many landlords have used a buy-to-let mortgage to secure an investment the biggest cost to their rental business is their loan costs. Inflation however is good news for borrowers such as landlords and this is why.
Inflation and buy-to-let loans
If a landlord takes out an interest only buy-to-let loan of £100,000 over 20 years in a zero inflation economy such as somewhere like Japan, then in 20 years time that buy-to-let mortgage would still have a real value of £100,000. Now take for example that inflation runs at the current Bank of England’s target rate of 2%. This means that in 20 years time the actual real value of the buy-to-let loan will have reduced to £67,297.
Now take the situation where inflation runs at double the Bank of England’s target rate at a long term average of say 4%. In this scenario the real value of the loan falls to less than half its’ original real value to £45,639
Therefore, with house prices falling and buy-to-let finance costs rising, being a landlord may not feel like being a great place to be. However, inflation could be just the thing that landlords need to shrink the real value of their buy-to-let loans. Just as the saying goes, with every grey sky, there is a silver lining. In this case inflation could well be it!