Should I still invest in property when interest rates are high?

Is it a good idea to invest in buy-to-let property when interest rates are high? We're seeing this question come up time and time again in today's economy. Read on to find out why GetGround's founder and CEO, Dr. Moubin-Faizullah Khan, thinks it is.

The days of ultra-low interest rates appear to be behind us, for the time being at least. Recent months have seen the base rate consistently increased by the Bank of England, while mortgage borrowers are facing higher rates than have been the case for some time.

Yet while this presents something of a challenge to the housing market, the fundamental benefits of investing in UK property remain largely unchanged. For those willing to take a long-term view, the buy-to-let market continues to offer opportunities for those looking to put their money into bricks and mortar.

Saving on the purchase price

One of the inevitable by-products of high interest rates is that property prices will be driven lower. As the cost of borrowing goes up, demand from residential buyers understandably falls, particularly when they are already facing other pressures on their household finances, such as the persistent higher levels of inflation present in the UK today.

Annual house price rates of change for all dwellings, UK, January 2006 to March 2023

We are seeing the impacts of rising interest rates on property prices already. The UK House Price Index from the Office for National Statistics shows that the value of a typical home has dropped consistently since last September, from a high of £292,404 to its current level of £285,009.

This environment puts buyers in a stronger position when it comes to negotiating a price. There is less competition, meaning the vendor may consider lower prices than they would have just a few months ago. Essentially higher interest rates may open the door to a more attractive purchase price than would have been available when rates were low. This is supported by the latest research from Propertymark, which found that three quarters (74%) of estate agents report that most sales are being agreed at below the asking price.

It’s worth noting that around a third of landlords plan to sell off at least one property from their portfolio, according to recent stats from the National Residential Landlords Association. These properties come with the added bonus of a track record in the rental market, providing potential investors with a firmer insight into what sort of rents are achievable than is the case with properties which have been owner occupied up to now.

The opportunities of buying off plan

There are particular opportunities that come from purchasing new-build properties off plan at the moment. First and foremost, developers are feeling the pinch and will likely consider larger incentives for those projects already launched or will be pricing developments for today’s market. 

Couple this with the potential capital appreciation throughout the build, and the chances of the interest rate environment having normalised by the time the property is completed, then the prospect becomes even more attractive. 

Essentially investors who target these deals now will benefit from the best price and the best payment options, in part because of the higher interest rate environment we are now in the midst of.

Steady rental income

The general drop off in demand from would-be purchasers comes with a further benefit for savvy investors. 

As first-time buyers delay their planned purchase, they have to instead turn to the rental market, leading to greater levels of demand among prospective tenants. This not only gives investors a wider range of quality, reliable tenants from which to choose, but also provides a further boost to the rental incomes on offer.

Again, there are clear signs that this is already taking place. New figures from Zoopla show that the average rent is now £1,120 per calendar month, up by £110 a month ‒ or 10.9% ‒ on the same point a year ago.

With rental stock levels relatively unmoved, but demand on the rise, the income achievable will continue to grow, even if double digit increases are not sustainable over the long term. Zoopla for example suggests that rental inflation is likely to drop back to around 5%, which is nonetheless an excellent sign for investor returns.

Hedging against inflation

It’s no secret that we are living through a time of high inflation. While the consumer prices index (CPI) measurement of inflation dropped for the 12 months to April to 8.7%, from its previous level of 10.1%, it remains far higher than the Bank of England’s target of 2%.

And that is despite the Bank of England increasing the base rate on 12 successive occasions, with further increases now expected by the financial markets.

Getting a return on your cash during times of high inflation is not easy. It’s certainly not possible if you keep your money in cash, while stock markets are inevitably a volatile beast. 

Yet things are a little more predictable when it comes to property. We know that property has performed well against inflation, dating back decades, and the ongoing shortage means that this is likely to be the case for the future too. That likelihood of capital growth can help protect the value of your investment, and offset the impact of higher interest rates.

Taking the long term view

Finally, it’s worth remembering that interest rates are transient things. While rates may be high at the time of purchase, there’s no guarantee that they will remain at such a level for long. 

There will come a point when rates will start to decrease, and having already purchased, investors will be perfectly positioned to take advantage of those lower rates when refinancing their investment properties.

The truth is that property remains a compelling proposition for investors, even when interest rates are rising. Indeed, it may be that higher interest rates actually make property an even more appealing asset, offering greater opportunities for investors to pick up a well-priced property or secure a larger, ongoing rental income.