What is rising inflation?
Inflation measures the rate at which the price of key goods and services changes over time.
When inflation is rising, it means these things are becoming more expensive.
For example, if inflation is running at 3%, it means something that cost £1 last year will cost £1.03 this year.
There are several different indexes that measure changes to inflation. The key one for the housing market is the Consumer Prices Index (CPI).
This measures the price changes in a basket of 700 goods and services regularly purchased by consumers.
Why is rising inflation happening right now?
A few different things have combined to lead to rising inflation at the moment.
On the one hand, disruption to global supply chains has led to higher shipping costs. This in turn makes the price of certain goods more expensive.
At the same time, the conflict in Ukraine has led to higher oil and energy prices. Energy prices had already increased significantly during the past year.
These price rises not only impact the cost of heating your home and filling up your car. They also push up the prices of goods that need to be transported or manufactured.
Meanwhile, staff shortages mean some companies have had to increase wages to attract employees.
This cost increase is typically passed on to consumers.
Does rising inflation mean house prices go up or down?
You might expect rising inflation to mean that house prices will also rise, but this isn’t necessarily the case.
That's because houses are not included in the basket of goods used to calculate the CPI.
There is a separate index, known as the CPIH, which catchily stands for 'Consumer Prices Index including owner occupiers' housing costs'. This, as you may have guessed, includes housing costs.
As a general rule, rising inflation tends to lead to slower house price growth.
There are two reasons for this. The first reason is that one of the Bank of England’s tasks is to keep CPI inflation as close to 2% as possible.
If inflation rises above this target, the Bank of England may raise interest rates to try to reduce it.
When interest rates rise, so do mortgage rates. This makes buying a home more expensive.
Secondly, when inflation is rising, people have to spend more of their income on the daily necessities such as food, petrol and heating.
Both of these factors reduce the amount people can afford to spend when purchasing a home.
As a result, house price growth tends to slow when inflation is rising.
The impact is not immediate. And it may take a few months before higher inflation is reflected in lower levels of housing market activity.
Does rising inflation make it harder or easier to get a mortgage?
Rising inflation tends to make it slightly harder to get a mortgage.
That's because lenders want to be sure you'll still be able to afford your monthly repayments in the months ahead.
If the cost of living is increasing, they may worry that you'll have to spend more of your income on things like food and energy. And that would leave you with less money for your mortgage repayments.
Lenders will also be wary that higher inflation will lead to interest rate rises. Higher interest rates will increase the cost of your future mortgage repayments.
Lenders will still be wary even if you are applying for a fixed rate mortgage, which doesn’t move up or down in line with changes to interest rates.
That's because they want to be sure you'll still be able to afford the repayments when your current mortgage ends and you go on to their standard variable rate.
That said, it's important not to panic. Future interest rate rises are already built into lenders’ affordability calculations.
Although lenders tend to be more cautious during periods of rising inflation, it doesn’t mean they will automatically reject lots of potential borrowers.
Is it a good idea to buy a property during times of rising inflation?
The answer to this question depends a lot on your individual circumstances.
Do you have a secure job? Is there enough slack in your budget to afford your mortgage repayments if interest rates rise and living costs increase? If so, there is no reason to delay.
But it might not be a good time to make a big jump up the property ladder if your budget is already tight. Mainly because you might struggle to afford higher mortgage repayments if other costs continue to increase.
If you are currently renting, it's worth bearing in mind that your rent could also go up. In some cases, it is actually cheaper to buy a home than to rent one.
The important thing if you are thinking of moving, is to sit down and do a thorough budget. That way you'll ensure you can still afford your new home if your mortgage and other bills increase.
Is it a good idea to sell a property during times of rising inflation?
With inflation rising, house price growth is likely to slow, so selling now would enable you to lock in the gains you have made.
The higher cost of living is also likely to act as a brake on the property market.
As a result, if you wait to sell your home, it may take you longer to find a buyer.
That said, don’t base your decision purely on what's happening to inflation.
You should also ask yourself if now is the right time for you personally to sell.
And if you're planning on trading up the property ladder, make sure you'll still be able to afford your new mortgage repayments.
What can homeowners do to protect themselves during times of rising inflation?
The most important thing you can do is to review your budget. Make sure you know exactly how much you have going in and out each month.
Next look for any areas where you can reduce spending. These may include cancelling subscriptions you don’t really need, or changing your utility provider.
If you are currently on your lender’s standard variable rate, think about remortgaging to a cheaper deal.
The standard variable rate is the mortgage rate you go on to when your fixed-term deal ends.
But standard variable rates are significantly higher than rates for new mortgage deals.
In fact, they are an average of nearly 2% higher. As a result, remortgaging would save someone with a £200,000 mortgage more than £200 a month.