Russia has invaded Ukraine and of course people are worried. Lots of people have been asking us, what does this mean for inflation, house prices and interest rates? Mark Homer takes a look and tells us his thoughts on the implications for the UK economy and market.
Russian property investments within the UK economy
It’s estimated that something like 1,100 Russians own property in the UK. A broad estimate attributes about £1.5billion worth of property owned by companies and trusts that are controlled by Russians. Some of these entities are likely to be laundering money. Russians are very active in the London property market, especially in West London. Even if you kick all the Russians out of London, (which will not happen), and stop them buying properties, is it going to affect house prices regionally across the rest of the UK? It will have some effect, certainly in West London, but that’s about it.
Mark thinks it’s pretty unlikely due to the relatively small amount of properties that this cohort owns within the UK economy.
As gas and oil prices increase on the world market, this contributes to increased inflation in the UK. This is partly because the price at the petrol pumps goes up and gas being burnt to heat homes and businesses increases. Some sources are now suggesting that UK petrol prices could hit £2.50 per litre and diesel £3.00. You’ve already seen gas and electric prices increase significantly post pandemic. It looks like the war in Ukraine is clearly going to push gas and electric prices even higher. This will have a continuing effect on the UK economy.
There is a price cap, which is imposed by Ofgem, which delays the increases in your electricity and gas bills. But that only lasts about a year. As of April 1st 2022, this price cap will increase by 54%. This is done in order to cope with the skyrocketing costs of fuel. Approximately 22 million UK customers are going to feel those increased energy prices. They’re going to go up even further since Ukraine was invaded.
Does that have a massive impact on inflation?
When the Bank of England is determining what interest rates are going to be, the Monetary Policy Committee sits down and they look at one measure, which actually strips out energy prices and also the cost of mortgages to look at core prices, excluding elements which can be more volatile.
So, on one measure actually, this won’t affect the inflation numbers that the Bank of England are looking at. But clearly, this definitely has a wider impact on inflation. Energy prices are very important, because they are the raw material for lots and lots of products coming out of factories. Then the cost of that transport gets added onto the price of the goods, as all goods use some form of transport. The biggest percentage of the cost of transport would be diesel or petrol, or if you’re using aircraft, you might have the aviation fuel, avgas. All of this comes from gas and oil, so, there is going to be a further increase in inflation after this invasion.
Does that mean that the interest rates are going up?
Well, Mark has been looking at the 10-year gilt, which is the UK Government central bond that they issue. Those gilt rates are very interesting. Generally speaking, as those gilts increase in value, the expectation is that the interest rates will be lower. Now, just in the last few days, the UK Government’s gilt has increased significantly. That UK Government gilt solidifies all of the inflation and interest rate expectations. But along with that, it also encapsulates how much risk the market is willing to take.
At the moment, the market is running more scared than it was a couple of weeks ago. Lots of stocks have been hit really hard. So, more money is going into bonds, as this happens, the expectation is that there’s a flight from risk. This means that economic growth could slow down and that has a dampening effect on inflation. All in all, is this going to make interest rates go skyward? In the short term Mark thinks it’s pretty unlikely.
The market believes that the UK base rate is headed for 1.5%-2% which is likely to put a lid on economic growth and inflation. Huge double digit interest rates, as were seen in the 1970s post the oil embargo, seem unlikely as they would have a hugely negative effect on economic growth (likely recessionary), potentially causing deflation considering how much higher asset prices are in 2022 versus 1973.
If you’re worried about the financial implications due to everything that’s going on right now, and are currently feeling the pinch in the UK economy, then one of the best ways to protect your money is to invest in assets.
What can you do about the current economic uncertainties?
This is THE time to start investing in property. Whether you’re brand new to property or already an investor who wants to scale their portfolio, you need to learn how to invest correctly.
With inflation at an all time high and forecasted to get even higher, the situation is volatile and uncertain. Any savings you have sitting in the bank are actually depreciating in value year on year. Clearly keeping savings in the bank is a bad idea.
It’s time to act now and invest your money into assets and property is one of the safest investments anyone can make. Assets such as property, give you a diversified portfolio as it can potentially help minimise losses if the market takes big swings in reaction to events like inflation. Long term appreciation on property value should beat the rise in inflation.
If you’re a property investor, you can also benefit from inflation by implementing higher rent prices while keeping your mortgage the same, as well as gaining recurring income. Want to know more about investing in property, to get the most value from your savings?
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