Where does UK property and interest rates go from here? Economy shrinking, Inflation rising and rental values apparently falling…

Let’s start off here. If an economy is contracting this typically means that unemployment is rising, the reason for this is that, the size of an economy is measured on GDP (Gross Domestic Product) this is the total amount in pounds of everything circulating through the economy in a given year.

The formula for GDP is C + I + G + (X-M) = GDP

Where C = Consumer expenditure, I = Investment, G = Government expenditure and X – M = exports minus imports i.e. the total value added to products in this country.

If people are spending less, people are making less profit. If inflation is present it should be easier for GDP to increase as prices are rising, but the figure given as -0.5% is “real terms GDP” this is the total increase having taken into account inflation. Now, inflation can do two things it can lead to further spending or it can stop spending and send an economy into negative growth (much like it, seemingly has here) the reason it can do two things are:

1.       Inflation can lead on to further inflation as people decide to purchase goods early before prices rise further. Resulting in further rises.

2.       Inflation can lead to negative growth as people begin to slow their spending habits as prices hit certain levels i.e. a £9.99 CD becoming a £10.19 CD, the psychological effect of this small rise can damage sales, but the shop has no choice but to raise prices as prices of other goods and services are rising.

However I don’t feel that the negative growth can be solely attributed to increasing prices etc. What must be taken into account is the good old weather of the UK! Because of the poor weather conditions we suffered in December much of the country was unable to get to work and even unable to go out and spend.

But there are two significant ways for a government to battle inflation at the scary 3.7% it currently is and that is… raise VAT, or raise interest rates.

VAT has been raised from the beginning of 2011 and I feel we are yet to see the full effect of this in the figure of 3.7% inflation which was given at the beginning of the year. But now there are lots of rumours of an interest rate hike on the back of this as well, which should of course slow down inflation, but could quite easily send us back into negative growth and further stagflation where growth is stagnant and inflation is still present.

Now if interest rates were to rise I feel there will be lots of unhappy landlords on Tracker Mortgages, especially when rental values are apparently falling (this is taken from a generalised figure, which we try not to rely on too much in this industry) but this will normally mean less in the landlords pocket and in some cases, more out of their pocket!

Further to this we have the savers. Savers have had a particularly hard time throughout the recession, low interest rates and constant inflation means that at no point have they really been “better off” apart from possibly sheltering from losses in certain markets.

We still firmly believe that purchasing property through us on one of our developments is your best way to 1. Build up a portfolio for your retirement or 2. Make a “hands-off” profit, for years to come… or 3. Both!

We have some excellent investment opportunities at the moment; both UK Property and Overseas Property please contact us for more details. In times like these it really pays to think Fresh