House prices ‘to rise by 13%’. Is property the ultimate inflation hedge?

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The government’s economic forecaster, the Office for Budget Responsibility (OBR), suggests that by 2023, house prices will have surged by almost 13% in the space of three years. With this extraordinary growth in mind, is it time to consider property as the ultimate inflation hedge? Let’s explore.

What did the OBR’s report say about house prices?

The OBR released its Economic and fiscal outlook on the same day as the chancellor revealed his Autumn Budget. 

In its report, the OBR claims that over the past year, house prices had risen ‘significantly faster’ than expected.

The forecaster suggests that changing ways of working and homeowners’ desire for more space are the two biggest factors behind rising prices. The OBR also claims the availability of low-cost mortgages, the accumulation of ‘forced savings’ during the pandemic, and the Stamp Duty holiday have all helped fuel housing demand.

While the OBR did say house price inflation will ease in the coming months, it doesn’t expect prices to fall. This contrasts with what the forecaster said in March, when it predicted prices would fall.

In its latest report, aside from suggesting an 8.6% rise this year, the OBR predicted that house prices will increase a further 3.2% in 2022, and a further 0.9% in 2023. The OBR said rising prices would slow due to the likelihood of higher interest rates in future. If this happens, it will increase the cost of mortgages.

What’s the current situation with inflation? 

The current rate of inflation stands at 3.1% according to the Consumer Price Index. This figure is well above the government’s 2% annual inflation target.

Aside from this, fears are also mounting that inflation is set to rise further by the end of the year. In fact, the OBR itself has suggested the inflation rate could hit 5% by next year. The forecaster says this would be the “highest rate seen in the UK for three decades”.

While the government has revealed it is willing to act on rising inflation, the ultimate responsibility for controlling inflation lies with the Bank of England (BoE).

That’s because the BoE is in charge of the nation’s monetary policy and the hugely important base rate. Many believe that the BoE won’t raise its base rate from its current 0.1% until it absolutely has to. That’s because upping the base rate would have a massive impact on debtors – including the UK government!

Those with savings will also be aware that current savings rates are pitiful. As a result, stashing cash in an account that pays anything close to the current rate of inflation is impossible.

It’s worth noting that those more open to risk may hope to beat inflation by investing in the stock market. However, investors usually don’t escape the impact of inflation either. That’s because rising prices can increase costs for businesses. Dividends also typically take a hit when inflation is high.

Bearing in mind the OBR’s prediction that house prices will continue upwards, many will be wondering whether houses are an effective hedge against inflation.

Are houses the ultimate inflation hedge?

While the OBR is confident in its predictions that house prices will continue to rise, the housing market is notoriously difficult to predict.

We know that few predicted a surge in house prices during the pandemic and it would take a brave person to claim they know the future direction of house prices for certain.

Here are three reasons why I think house prices may not be the most effective inflation hedge.

1. Interest rates are likely to rise

No one knows exactly when it will happen, but the bank of England will, at some point, have to raise its base rate to curb rising prices. As acknowledged by the OBR, when this happens mortgage interest rates will become more expensive, which could lead to lower house prices.

2. The ‘race for space’ will no longer be a factor

The desire for more space during the pandemic has undoubtedly placed pressure on house prices. Yet this demand will eventually lessen as those looking for more space make their moves.

3. The Stamp Duty holiday has now ended

Some government critics have claimed that housing support schemes, such as the recent Stamp Duty holiday, do nothing other than to help to inflate house prices. A lack of new schemes announced in the Autumn Budget may therefore lead to a market correction over the next few years.

Whatever your views on the housing market, if you’re looking to buy a property in future, take the time to read our guide that explains what you need to know about buying a house in the UK.

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