Is inflation about to roar back and what could it mean for property investors?

Inflation has been a critical factor shaping the macroeconomic landscape in recent years, influencing both the global economy and real estate markets. It directly impacts central bank interest rate decisions, which in turn dictate the cost of financing- an essential element for property investors funding their projects.

Phrases like "survive 'til '25" have circulated in property investment circles over the past year, reflecting the hope that falling inflation and subsequent interest rate cuts in 2025 would trigger a rebound in real estate markets. This anticipated recovery is expected to ease refinancing risks and boost valuations and new project launches. As 2025 approaches, we’re about to see if these predictions hold true.

Until late summer, things were looking promising. Inflation across developed nations had spent the year trending downwards, interest rates had started to fall and were expected to keep falling – all positives for real estate markets. Suddenly though, it looks like this may reverse.

In the UK, the Bank of England reckons new Chancellor Rachel Reeves's first budget will increase inflation by up to half a percentage point over the next two years, driven by big rises in public spending, ultimately leading to a slower decline in interest rates than many had been expecting. 

Days after the UK budget, Trump was elected in the US. Throughout his campaign he described tariffs as the most “beautiful” word in the English language, for the role he believes they can play in protecting the US economy. However, many economists fear his tariffs will be inflationary as they drive up prices of imported goods. What impact tariffs have on US inflation will ultimately depend on how far they go and how aggressive they are. Many investors will be hoping Trump was just talking tough on the campaign, and he ultimately won’t introduce overly steep tariffs. 

But these aren’t the only factors threatening to let the inflation genie out of the bottle again. Other tax cuts and policies designed to drive growth Trump touted in his election campaign could also increase the chances of the US economy overheating. As a result, investors are scaling back how quickly they expect the Federal Reserve to cut rates in the US, with yields on 10-year US Treasuries rising recently. 

If rate cuts are delayed in the US, we’ll probably see the same in Europe given the potential knock-on effect and the tendency of other major central banks to move in unison with the Federal Reserve. 

Where we go from here remains to be seen. But what’s clear is any players in the real estate market who were under pressure to survive ‘til 25, aren’t going to be out of the woods in January. 

The flipside is there will continue to be opportunities for well capitalised investors able to acquire assets at a discount from property owners less able to operate in an environment where inflation, and in turn interest rates, remain higher for longer.