19% inflation and 6% Bank Base Rate

19% inflation and 6% Bank Base Rate

20:47 PM, 24th August 2022, About 3 months ago 5

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Only this week, Citibank predicted that UK inflation would exceed 18% by January next year and that the Bank of England would feel compelled to increase the base rate to 6%.

How many of us are prepared for this?

Whilst some of our readers will have have vague recollections of high inflation in the 1970’s and 80’s, very few will have been running a rental property business. It was the era of National Strikes, Power Cuts and mass unemployment. I was still in school until 1984!

There was no Landlord and Tenant Act back in those days. Evicting a ‘sitting tenant’ was nigh on impossible. However, whether you worshiped or despised her, good old Maggie Thatcher was responsible for sorting that mess out.  I often wonder, if she was still alive today, what she would be saying about the abolition of Section 21 notices, the Section 24 restrictions on finance cost relief, Selective Licensing and all the red tape created to persecute landlords since her reign of power? Sadly, all the signs point to us heading back to the misery of that period in history before Number 10 became Maggie’s Den.

I have to admit, I’m terrified yet excited at the same time. I’m terrified because I have little to no experience of running a business in a high inflation environment. I have a bit of experience of high interest rates, they peaked at 15% in the late 1990’s, but that was relatively short lived. It left a huge scar for me though, so I’ve always maintained a strategy to deal with a similar scenario if it ever happens again. I documented that strategy back in 2010, which was back in the days when I still had hair LOL 🙂 You can still read that series of articles to this day, right here on Property118 via this link.

One of the reasons I’m excited is that the difference between a 6% base rate and 19% inflation is a margin of 13% to tap into. Quite how I’m less certain about. However, one thing we do know from history is that that the price of average properties double much quicker in times of high inflation.

The chart below uses the Nationwide House Price index to plot average property prices over  70 years. The red dots indicate the time it took for property values to double. As you will see, they are much closer together during periods of high inflation and much further apart in periods of low inflation, which is pretty much the period during I’ve been building my property rental business.

There will doubtless be many new property investment business models and it will be interesting to see them evolve. Perhaps a few old chestnuts will be resurrected too? One thing I’m quite certain about is that ‘Property Educators’ will be milking this as a ‘once in a lifetime opportunity’ to ‘Get Rich Quick’ off the back of the Purchase Lease Option model, and they might be right. A variation on that theme, where I actually pay sensible money for a Purchase Lease Option with a fixed rent and permission to sublet for say seven years has certainly crossed my mind. The devil will be in the detail of course, and I haven’t quite got that worked out yet. When I do I will be happy to share it, but not before I’ve filled my boots of course. I’d be foolish to create my own competition wouldn’t I? One thing I can promise you is this; I will not be selling ‘the secrets of a Get Rich Quick scheme’ to anybody. If I do go down this path, and if it works, I will share my strategy right here on Property118 for free, just as I have always done. You can hold me to that!



Comments

Mick Roberts

10:22 AM, 25th August 2022, About 3 months ago

1984 same as me-Keep that quiet please.

Great chart & explanation.

John

10:33 AM, 25th August 2022, About 3 months ago

If people have woken up to phrases like the new world order, the WEF, build back better or you will own nothing and be happy. You will be aware of how this taps into what I write.

Dominic Friday from moneyweek has a respected mate who feels interest rates will not be stopped from going much higher than the system can withstand. So the system is going to have to get used to rates over the 5% level. How high I can’t say but my feeling is high rates are coming and it is part of the plan to crash the system.

Up to 5% for most people will be tough. 5% base really means 7% mortgage rate if you are lucky. Yields on property will need to rise. I can see rents riding but capitalvalues will have to fall as well.

I’m telling friends if they have spare cash to lower the mortgage burden.

Debt is good but we are heading into a once in a generation inflexion point so being over exposed will bring everything tumbling down.

SCP

13:35 PM, 25th August 2022, About 3 months ago

Those were the days.
I think I remember them...
I had a cautious conservative model.
I did not expect to make an immediate annual profit: why should a Tenant make me "rich"?
I minimised my losses.
Always had a repayment mortgage.
I always took out an Endowment Mortgage or a with-Profits Policy with top names such as NPI, London Life, Standard Life, Equitable Life.
I obtained LAPR relief on the premiums and tax relief on the interest payments.
The idea was that the property investments and the life policies should see me alright.
All the policies matured long ago before these insurance companies disappeared.
I have not done too badly.

TheBiggerPicture

16:48 PM, 25th August 2022, About 3 months ago

There are different types of inflation.
The inflation we had previously may not be the type we have this time. So drawing parallels may be difficult.

Paul Routledge

7:14 AM, 26th August 2022, About 3 months ago

The last of my mortgages are fixed for 6 years at below 5% and I "WILL" be raising my rents as much as possible in line with inflation. As far as I am concerned this government is helping drive inflation with its taxes on fuel, vat, lack of investment into our own energy and GDP in general, so I feel if government can take 100% tax off of people who fill their cars to get to work and their kids to school, why do they think I have a moral obligation to support my tenants when I can ger inflationary rent rises over the next 3 years.

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