Property Market Economics

Posted on 06 May 2022

Basic Property Market Economics Investors Should Consider


Real estate investing is a great way to build wealth over time and can be profitable as long as you know what you're doing. However, as with all investments, property investment carries risk.

So if you want to get started in real estate investment, get a good understanding of the basics about what influences the property market first.  Then you will need to decide what you want to invest in and make sure you do your research and due diligence. 

There are so many different investment options available from simple buy-to-lets, HMO’s (house of multiple occupancy), serviced accommodation, holiday lets, commercial conversions, etc.

In this article we will discuss basic property market economics, such as interest rates, inflation, supply and demand and government policies. Understanding these concepts will help you make better decisions when you start your property journey.

Core Market Economics Explained

1. Interest Rates

Most investment properties are financed with a mortgage. Depending on the property type, these can be either a residential, business, or a commercial mortgage.  Lenders will charge either a variable or fixed rate interest for providing a loan. There are many mortgage options available, varying in term length, deposit required, cashback etc.

Interest rates can influence the property market. When interest rates rise, borrowers pay more interest, and it often decreases demand for housing (depending on the interest rise). Conversely, when interest rates fall, it normally increases the demand for housing.  

It is possible to fix your interest rate for a fixed term which will help manage your budgets more easily.

2. Inflation

Inflation affects everyone. With rising inflation, the cost of goods and living tend to go up.

Recently we have seen inflation rise and this has had a huge impact in the property market.  The costs of goods have sometimes doubled or tripled in value, such as timber prices.  This results in a decrease in profits - unless the cost increase is passed on to the consumer.  For example, a landlord who fits a new bathroom has to pay more, reducing his profit margin.  The landlord could potentially increase the rent to offset some of the costs, affecting the cost of living for his tenant.   

Another Example:

  • You have £100 in the bank
  • You are getting 2% interest on it per year
  • The rate of inflation is 7%.  Note, inflation was at 0.7% in March 2021.
  • You are at a -5% per annum position.

If your income or assets don’t keep up with the rise in inflation, your purchasing power erodes.  This ultimately reduces the value of your assets.

What causes inflation?  Well, there are several causes. These include Government increases in spending, taxation increases, natural events like earthquakes and floods, wars and more. 

3. Supply and Demand

In very simple terms, supply refers to the number of properties available for sale. Demand refers to the number of buyers looking to buy those properties.

Supply and demand are related because if many buyers want to buy a property, there will be fewer properties for sale. This will mean that prices for those properties will go up.  Conversely, if there aren't enough buyers, there will be more properties remaining for sale and prices could fall.

We have seen this over the past few years in the property market.  Since Covid hit, the property market has been very buoyant, breaking house price records month on month.  Over the past 2 years, demand for houses has been huge and properties have been selling like hot cakes.  Timing your property purchase correctly, can increase the value of your investment in a very short time period.

4. Location, Location, Location

One of the important decisions for a property investor is researching and knowing where to buy.  This very much depends upon your chosen strategy for property investment.  Who are your target audience?  For example, if you are looking to rent to a family, you may want to be close to schools, have a garden etc.  Alternatively, you may want to provide accommodation for medical staff near to hospitals, rent out student accommodation near universities or holiday lets near the sea.  Researching, knowing, and choosing the right location is key to a successful property investment strategy.

5. Government Policy

Government policies impact the property market.  For example, restrictions on planning to protect the environment may reduce the number of new homes.  Recent changes include permitted development rights (including commercial) and increases in minimum property sizes (reducing the number of micro flats). If you’re looking to become a landlord, there is already a lot of legislation you need to be aware of. Understanding the current rules is important to ensure you manage your business and don’t make expensive mistakes.

6. Property Taxation

There are many ways in which the government taxes property.  First when you buy a property you will have to pay Stamp Duty.  During lockdown the chancellor introduced a stamp duty holiday to stimulate the property market, which was vital to the economy.  It definitely gave the market a boost.  When you sell an investment property, you will have to pay Capital Gains tax.  The structure of your investments (individual, through a company etc) will determine your annual tax bill.  It is best to talk to a tax specialist to find the best way to structure your property investment.  

Why is the Housing Market Important to the Economy?

Consumer spending is closely linked to the housing market. When house prices go up, homeowners become better off and feel more confident. Some borrow more against the value of their home, either to spend, renovate their house, supplement their pension, or invest.

When the housing market goes down, it slows down the economy. It leads to lower incomes and consumer spending, which in turn hurts businesses.  People are more likely to cut down on spending and hold off from making personal investments.

That's why the health of the property market is often used as an indicator to the health of the economy.

Start Investing in UK Property

Property investing is a great way to generate passive income and build wealth over time. There are many property millionaires out there.  However, it is important to understand this is not a quick get rich scheme and it takes a lot of time and effort.  With this article we wanted to share insight of some of the market principles.

To start small, consider investing in property through a crowdfunding platform.  Crowdfunding gives you the ability to invest in property without the hassle of  having to purchase, develop and manage it yourself.   And it offers many other benefits.

Crowdfunding platforms offer multiple projects to invest in.  Investors can diversify their investments across multiple projects, allowing investors to spread their investment risk.  Depending on your own appetite for risk, you can choose to invest in peer to peer loans or equity projects.  Peer to peer loans offer fixed returns over a fixed period of time, whereas equity projects tend to offer higher returns, with a higher risk.  

Learn more about accessing property through crowd here:

Simple Crowdfunding offer both equity and peer to peer lending opportunities and we are authorised and regulated by the Financial Conduct Authority.

Investment Risk

All investments carry risk and returns are not guaranteed.  Remember to always do your own due diligence, read the information provided and ask questions.