Residential house prices increased by more than 10 per cent in 2021 and just over 6 per cent in 2022. This year, property prices are expected to surge by a further 5 per cent, despite the impact of higher mortgage rates.
Property prices also tend to rise in periods of high inflation because the costs of labour and building materials make construction less economically viable, further limiting new property supply, which, as we know, is already a problem in the UK.
Property prices have strengthened in specific pockets of the market during the pandemic, as many families chose to sell their homes in big cities such as London, while using the balance to buy larger family homes in the country from which many opted to work.
As a result, three-bedroom family homes with gardens and spare space to set up an office in rural or village locations have seen uplifts of between 15 and 20 per cent during the pandemic.
Similarly, two and three-bedroom flats in London have seen similarly outsized increases in value over the past two years. I have spotted a noticeable trend of fewer people attending Zoom meetings from their bedroom, a witness to the growing trend towards larger properties.
5. Commercial property
The commercial property market is in the process of some reinvention – especially as demand for office space faces an uncertain future as the new hybrid working model persists.
The lower-quality offices are probably the ones most at risk. However, it is possible to buy commercial property funds that specifically exclude office space, focusing instead on industrial, warehousing and retail units for example.
For those who do not want to buy bricks and mortar outright but instead seek exposure to the sector’s growth, they can consider real estate investment trusts, which have historically performed well during periods of high inflation. They have the added advantage for would-be retirees of being a permissible investment in self-invested personal pensions and small self-administered schemes.
In addition, most commercial property leases worldwide are linked to one or other measure of inflation. So commercial rents often rise by the prevailing CPI or RPI rates of inflation.
However, be aware of “caps” and “collars”, which can be built into commercial lease terms. It is not uncommon for leases to limit increases in so called “ratchetclauses” in commercial leaseholds, that is clauses gives landlords the option to increase rent by up to a specific percentage each year.
For example, in the long period of low inflation that we have seen over the past 10 years or more, many leases set ratchet clauses to no higher than 5 per cent a year. However, now that CPI is running at just over 10 per cent, that is not nearly enough.
