London, UK (PRWEB) September 2, 2008
Inflation is on the way back.
The Consumer Price Index has risen 0.6% from June to July (and is now over double the Bank of England's official target of 2%) and the Retail Price Index (excluding mortgage interest bills) has increased by 0.5% to reach 5.3% (which is over double its old 2.5% target). The main factors for inflation are coming from abroad in the form of rising fuel and food prices with food and non-alcoholic drinks increasing at a record pace. A survey by The Economist of 55 countries has shown that 12 have double digit inflation rates.
Is inflation good news for landlords?
Most economists argue inflation is bad for the economy. The lack of stable prices makes economic decisions very difficult for both businesses and consumers. Landlords suffer from rising costs and prices, like any other consumer. Marc von Grundherr, Lettings Director of Benham & Reeves Residential Lettings, comments that in the past few years' landlords have suffered from massive labour price inflation, as skill shortages have increased the costs of using tradesmen, such as plumbers, builders and decorators. Plus there have been other cost increases, such as accountancy and buy-to-let insurance rates, which continue to climb. But the main advantage of inflation for landlords is that many have used a buy-to-let mortgage to secure their property investment and inflation can reduce the value of their buy-to-let loans.
Benham & Reeves Residential Lettings' Marc von Grundherr, advises how inflation reduces a buy-to-let mortgage.
Inflation and buy-to-let loans:
If a landlord takes out an interest only buy-to-let mortgage of £100,000 over a period of 20 years in a zero inflation economy (e.g. in Japan), then in 20 years' time that buy-to-let loan would still have a real value of £100,000. But if inflation runs at the current Bank of England's target rate of 2%, in 20 years' time, the actual real value of the buy-to-let mortgage will have reduced to £67,297. If, however, inflation runs at double the Bank of England's target rate at say an average of 4%, then the real value of the buy-to-let mortgage falls to below half its original real value to £45,639.
A great time to be a landlord:
So with house prices falling and labour and insurance costs rising, many feel it's a bad time to be a Landlord, but Marc von Grundherr of Benham & Reeves Residential Lettings argues this simply isn't true - and states that "Professional landlords know that it's a great time to buy because:
1. They can pick up buy-to-let properties at bargain prices.
2. Rents are increasing rapidly.
3. Borrowing costs are dropping. The Bank of England has cut interest rates three times this year and is doing its best to keep them as low as possible.
4. Inflation is shrinking the real value of buy-to-let loans.
So landlords are finding that in the present market borrowing is cheap and their debt balance is devalued due to inflation running above the Bank of England's targets.
About Benham and Reeves Residential Lettings:
With nine offices in the best parts of London - handling only lettings, if you need any advice contact us, London's leading independent Letting Specialists.