How does a rise in inflation affect house prices in the UK?

There are a wide range of factors that can affect house prices such as supply and demand, interest rates and the state of the economy. The rate of inflation can have an impact on the cost of a home, causing house prices to either increase or decrease.

The Office for National Statistics revealed yesterday (June 23) that UK inflation has risen again, and is now at the highest rate in 40 years. As the cost of living crisis has worsening, the statisticians reported that inflation rose from 9 per cent in April to 9.1 per cent in May.

As the price of goods and services rise, inflation can drive house prices up even higher. Due to inflation the reducing amount that people can afford to spend on a home, this can then cause potential buyers, especially first-time buyers, to be priced out of the market.

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Along with inflation, UK house prices have increased significantly in the last year alone. The price of a property coming onto the market in May hit a fifth consecutive record with the average house price in the UK recorded at £368,614 by Rightmove.

This is 6 per cent higher than in May last year, and more than double the average house price in May five years ago.

With inflation at a 40-year high and expectations for it to climb above 10%, new research has found that the impact of the rising cost of living could delay first time buyers from saving for a deposit for a home in Manchester.

Online mortgage broker Mojo Mortgages analyzed average house price data from Zoopla and salary data from the Office of National Statistics to assess the impact of a 10% reduction in savings due to inflation.

Looking at an individual in Manchester earning an average salary of £26,596, a rise in inflation could mean it would take them 16.6 years to save a 15% deposit on an average property priced at £238,519, says the mortgage broker.

Even for buyers in Manchester saving for a smaller 5% deposit, the impact of inflation would add an extra three years of saving. The smaller deposit would also result in a more limited choice of mortgage products and higher interest rates.

Richard Hayes, founder and CEO of Mojo Mortgages, said: “Record house price growth and inflation hitting a 40-year high will impact everyone looking to buy a house, but the current economic situation is hitting first time buyers particularly hard.

“To compound matters, the cost of living is increasing just as people are looking to return to a more normal social life, which makes cutting back on discretionary spending difficult. Rising interest rates will also help people with savings, but it will take longer for these savings to be passed on to savers and more people will be forced to dip into their savings to meet rising household bills.

“The good news is that mortgage rates are still relatively low, so there are some great deals available for those who are able to save a deposit. Not everyone is fortunate to have financial support from their parents, but if first time buyers are able to cut back on their spending, set strict budgets and potentially buy a property with friends or partners, the goal of collecting the keys to their first property could be more achievable.”

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