10:29 AM, 19th October 2011, About 10 years ago
With inflation hitting a 20 year high at 5.2%, the headlines are screaming doom and gloom. Instead, step back and read what high inflation and quantitive easing means to landlords running a buy to let business.
The Consumer Price Index (CPI) – the government’s official inflation monitor – has registered 5.2% for September and is going to directly impact returns from savings and investments.
A saver paying basic rate tax (20%) would need a savings account paying 6.5% to earn a return, a higher-rate taxpayer (40%) would need an account paying at least 8.67%. Both are unobtainable in the current market.
The last time the CPI was higher was at 7.2% in March 1992, according to the Office for National Statistics (ONS).
Annual inflation also soared to 5.2% in September 2008 when oil surged to an all-time high of $147 a barrel and the world was slipping in to the credit crisis following the failure of Lehman Brothers.
The ONS said that the price rises of four of the six large utility companies have been factored into the inflation figure so far. The other two will be reflected in the October inflation figures.
Energy prices are blamed for the rising cost of living – gas and electricity bills are 18.3% more expensive now than a year ago. Transport costs are also up 12.8%.
The Bank of England target for inflation is 2%.
The Bank believes the current raging inflation is about as bad as it is going to get; increased utility costs and other inflationary pressures will gradually work their way through the economy over the coming months. In a year, inflation should be down to a more manageable 3% or so.
The Bank utilises two tools to control inflation – interest rates and quantitive easing.
Interest rates are already at the record low of 0.5% and do not really have anywhere else to go. Rates cannot fall below 0%.
The Bank has committed to injecting another £75 billion into the economy by the end of 2011, this will be through buying gilts and bank bonds. The effect is giving commercial banks the cash to lend to businesses and customers to promote investment and spending.
The net effect for property investors is little or no change – buy to let mortgage rates will stay around the same until interest rates start moving upwards.
Tenant demand is likely to stay strong as the banks will have little or no extra funds for first time buyers.
The risk is inflation will push up business rates on factories, shops and offices, which could push some firms over the brink, leading to job losses. Tenants who lose their jobs may then default of rents, driving up arrears.
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