Why Lowering Inflation Rates Could Be Good News for House Buyers:
This June, we witnessed a significant milestone: a notable drop in inflation rates. Prices in the UK rose by 2% in May 2024, down from 2.3% in the previous month - and the lowest rate of inflation for the UK in almost three years.
With inflation finally hitting the Bank of England's 2% target, what does that mean for buyers in 2024?
More Affordable Mortgages?
Firstly, lower inflation could lead to lower interest rates. The Bank of England typically adjusts the base rate to control inflation, so a lowering in inflation may lead to a reduction in the base rates.
It’s not totally surprising that this reduction didn’t happen on the 20th of June, when the base rate was held at 5.25%. The Monetary Policy Committee is looking to avoid "second round effects”, evaluating the wider economic landscape and no doubt considering the implications of the upcoming General Election. A combination that’ll ensure caution by the Committee, ensuring the base rate is adjusted when the Bank has more data that inflationary pressures have subsided and are sustainable.
Despite this, we’re already seeing movement - Barclays are the first to announce a reduction on some rates, with many other lenders expected to follow in the coming weeks.
For prospective house buyers, this is excellent news. Lower interest rates may translate to more affordable mortgage repayments. When interest rates are high, the cost of borrowing increases, making monthly mortgage payments a burden. Conversely, with lower rates, these payments become more manageable, enabling more people to step onto the property ladder.
Increased Purchasing Power?
Lower inflation also means that the purchasing power of money is preserved. In high inflation environments, the value of money diminishes quickly, making everyday goods and services more expensive. This can erode savings and reduce the amount of money available for savings, or making significant investments like purchasing a home.
With inflation in check, your savings hold their value longer, allowing you to accumulate a more substantial deposit, which can also help secure better mortgage deals.
Stabilising Property Market?
While the housing market is influenced by a myriad of factors, high inflation often leads towards a slump in property prices. As inflation rates soar, values often falter or even decrease in value.
The wider effects of inflation rates on potential buyers' pockets make finding the right buyer more difficult, with property chains often stagnating due to the more challenging market.
On the other hand, as inflation goes down, house prices tend to go up. Lower inflation tends to stabilise the sales market.
For those looking to purchase a home, a stable market provides the confidence to buy.
Enhanced Economic Confidence?
When inflation is around the government's target this is generally a sign of a stable and healthy economy. Economic stability boosts consumer confidence, encouraging more people to make significant financial commitments like buying a house.
When inflation is high, uncertainty prevails, and people are often hesitant to make large investments. With inflation under control, some buyers feel more secure in their financial decisions, knowing that the economy is on a stable path.
Better Long-term Planning?
For many, buying a house is a long-term investment. Lower inflation helps with long-term financial planning. When inflation is high and unpredictable, planning for the future becomes difficult, as the cost of living can change rapidly. With lower inflation, you can plan your finances with greater accuracy, ensuring that your investment in a property is sustainable over the long term.
The lowering of inflation rates in June 2024 is a promising development for house buyers in the UK. For those dreaming of owning their own home, these economic conditions provide a more accessible and stable pathway to achieving that goal.
As always, while the broader economic indicators are favourable, individual circumstances will vary, so it’s essential to seek personalised financial advice when considering a property purchase.