Trend: Zero inflation – impact on property?

Zero inflation and future ‘good’ deflation expected to promote stronger property prices but the general election adds aura of uncertainty…

Zero inflation reported 

  • zero inflation
    UK split of YoY CPI Inflation over 2000-15

    ONS reported that UK CPI inflation fell 0.3% YoY in January to zero in February, which is a record YoY low since 1989 marked the inception of CPI recorded data. Inflation for food, alcohol, energy and tobacco was -3.9% (vs -3.5% in January).

  • Core inflation (i.e. CPI ex food, drink, energy and tobacco) declined to 1.2% YoY vs 1.4% YoY in January  – not a record low.
    • Core inflation matches the average for 2000-07, a period in which CPI inflation averaged 1.6% YoY. It is within core items that things get interesting, with services inflation remaining relatively low (at 2.4% YoY in Feb in line with Jan) but consumer goods prices slipping into deflation (we note not as severe as in 2000-07).
    • It is expected that the lower oil price environment endured over recent months will feed through in household energy price cuts as well, with YoY rates turning negative in coming months. (Note: CPI inflation ex tax changes are already slightly negative at -0.1% YoY).

Going forward, ‘good deflation’ or ‘bad deflation’?

  • There is a split in views between the two concepts:
    • Good deflation i.e. a boost to real incomes that will subsequently result in greater confidence and spending, which will lift prices going forward reversing any deflationary spiral.
    • Bad deflation i.e. a precursor to renewed weakness in demand. Consumers will delay purchases with the expectation that prices will continue to fall resulting in lower spending and further compounding deflationary pressures.

Click here for a recent article going into more detail on the two types of deflation.

Which deflation is it and how does it impact London property and the UK real estate market overall?

  • It is too soon to tell but we anticipate good deflation so far. The decline in prices is expected to drive confidence and purchases. In the recent February consumer confidence survey, it showed that the share of people who believe it is a good time to make major purchases now rose in February to the highest level since 2007, and the figure for expectations of major purchases in the coming 12 months next year rose to the highest since 2003.
  • Larger real incomes will help the demand side in the London property market (which is facing issues with current price levels largely reported to be out of reach for the majority of locals who are left unable to clamber onto the property ladder). Structural supply side issues in the London market will largely not be impacted from zero deflation. Greater money in consumer pockets, recent consumer sentiment studies and the availability of cheap credit (see here for record low mortgage rates) is expected to drive property price increases. A short period of temporary deflation could certainly aid to boost the property market.
  • In addition, there seems to be some general uncertainty with regards to the looming general election with the overall view that the incumbent conservatives retaining power will help drive prices while a Labour victory will serve to temporarily depress property prices.
  • The impact on the property market is uncertain, however we have briefly outlined a few possible scenarios. Should the Conservatives stay in power, we expect property prices to rise going forward removing any uncertainty and also aided by a period of short term ‘good’ deflation.  However, if Labour wins, we anticipate a short period of relatively more depressed property prices. Under the latter scenario opportunities still remain for savvy investors, particularly for those who are cash rich and seeking to either 1) snap up strong cash flow yielding buy to let purchases (the rental market has boomed so far this year and presents a good investment opportunity going forward given the general trade-off between sales and lettings, or 2) acquire development projects with the aim of executing a rental strategy before selling when the market picks up momentum. Note, consumers generally prefer to buy property as the market is rising and this will happen again despite the 1Q lull. Opportunities will become clearer in the coming months, either for your existing portfolio or for new acquisitions.


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