The Spectre of Deflation
Landlords reeling from the impact of rocketing inflation such as: rising petrol prices, spiralling energy costs could be welcoming all these back with open arms if the latest spectre to haunt landlords rolls into town. What am I talking about? DEFLATION.
Where do professional landlords go for their landlord insurance?
The latest Bank of England forecast on inflation sees annual inflation currently at 5.2% slumping to 1% in two years time. Half the banks target rate set by the Government.
That should be good news, right? Falling prices have got to be good for everybody. Unfortunately not, if this represents a lack of demand in the economy. Low demand is the symptom of a depressed economy and a depressed economy is frequently associated with falling asset prices such as house prices.
The other factor about deflation is that it increases the size of a landlord’s debt. We reported recently that inflation could be a landlord’s saviour, the flipside to this is ‘Deflation.’
Deflation means falling prices, which means wages don’t rise and can fall, prices fall and so do asset prices such as houses. Hard to imagine I know given the long run increase in property values.
Deflation has been the curse of the Japanese economy over the last 20 years as it struggled to recover from a huge asset price bubble and subsequent bust in the early 90’s.
Despite their central bank holding interest rates at near zero for years, the fear of further drops in asset prices such as houses and shares meant that demand for money remained low. Why borrow money to buy a depreciating asset?
Are we heading for the same?
The UK suffered from a period of deflation during the First World War. The most famous period of deflation occurred in the US though, during the 1930’s in the Great Depression. During this time prices in the US fell 10% a year from 1930-33 and unemployment peaked at 25%.
The parallels for the global economy and the UK are worrying. The depression of the 1930’s started with a banking crisis. Ring any bells?
What can landlords do?
For existing landlords there is not awful lot that we can do. The two options are:
1. Sell up now, anticipating further falls and then potentially re-enter the residential investment market when prices are lower.
2. Hold on to your investment property and look to pay down your debt by using rising cashflows from lower interest rates.
For new landlords or those landlords who have been prompted by falling house prices to look at jumping into the residential investment market should think again. If deflation is in town then the asset price bubble may have some way to deflate before it starts to grow once more.
If there is a silver lining to the grey clouds of deflation it could be that rising unemployment could reverse the apparent one way street of rising maintenance costs. A glut of plumbers – what ever next?