The cost-of-living crisis is now beginning to bite, prices are rising, and in some cases going through the roof, wherever you look. From the cost of borrowing, fuel, energy, and in totally unexpected areas like our everyday shopping. Those on a lower income suffering the most. But with inflation rising faster than wage growth for the vast majority of people, even high earners are seeing the value of their income drop.
It is estimated that a family of four must spend at least £500 extra in a month to maintain their standard of living.
Inflation is rising above the government’s target of 2%. What are the key reasons that have caused the cost of living to rise so dramatically? A few factors are:
u Pandemic related restrictions on movement and work absences had a significant impact on the global supply of goods and services. Demand for certain goods during lockdown increased rapidly and then once lockdown eased, supply chain simply could not keep up with demand and expectations, resulting in prices rising.
• The overwhelming post-pandemic demand for goods made it impossible for shipping companies worldwide to deliver on time, so retailers must pay a lot more to get goods to their stores.
• Russia’s invasion of Ukraine led to food and energy supply issues.
• UK wage increases and higher national insurance contributions increased the cost of goods and services.
• Globally, oil and gas prices have risen, resulting in fuel costs spiralling out of control.
• The increase of the energy price, set by the regulator Ofgem in April, automatically resulted in everyone having to pay more for their energy.
What does the immediate future hold?
Both landlords and tenants will expect finances to be difficult throughout the remainder of 2022 and, possibly most of 2023, resulting from everyone having to spend more of their disposal income on energy bills, fuel costs, food, and general living. Many tenants are going to find it harder to afford to pay their rent.
Landlords will find it difficult to raise rents in line with inflation, and this could be detrimental because:
u The increasing cost of property maintenance and repairs will reduce profits.
u Rental profits will be worth less in real terms.
Although the next few years might be difficult, the Bank of England expects inflation to fall in 2022 and drop to 2% in a few years’ time. The Bank of England believes that the main cause of the current inflation will not continue.
Property rental businesses will emerge from the current cost of living crisis in good shape, but there are actions that are required now, to achieve this.
Increasing Rents
Every landlord strives to manage their property portfolios to the best of their abilities. Increasing rents on your properties is likely to be challenging for both the tenant and the landlord. The financial strain this will put on your tenants whilst the need to balance investment profitably to remain financially secure yourself is always going to be difficult. What is important in this situation is to be mindful of your tenants needs and ensure that you communicate effectively with them. Being honest with your tenants is paramount. If you must increase your rent to cover your own increased running costs, provide as much notice as possible and offer any support that may be available to them. No landlord wants to lose a good tenant!
Checking Your Own Costs
With prices rising so quickly, it is always worth ensuring that you review your expenditure on a regular basis, at least monthly. Keep a careful note of what is going out each month and review it carefully for trends, taking action where it is necessary to do so. Planning ahead is significant. You may not be able to achieve the returns that you desire now but fixing certain costs for the next 12 months or so will enable you to ride through the difficult times ahead.
If you have not reviewed your mortgage recently, or your current deal is coming to an end at any time within the next two years, it is worth contacting your mortgage adviser. Although, you may have to pay a penalty for leaving your existing commitments, the long-term savings do need to be explored. Thinking outside the box will help.
Long Term Prosperity
It will be naïve to think that short-term gains will be achievable in the Buy To Let market. The investment property market has always been able to provide long-term prosperity and profitability. However, anyone investing with a short-term view is more likely to incur losses on their investments. The current economic climate should be considered as a storm that will pass. Managing cash flow and keeping costs down as well as ensuring that tenants are financially stable enough to continue occupying your property are the key to successfully sailing through these choppy times ahead and returning to profitability and returns, to which you have become accustomed.
