Economic Factors Affecting Property Returns: What Every Investor Needs to Know

Introduction

Property has long been considered one of the most resilient asset classes. Bricks and mortar carry an appeal that goes beyond spreadsheets: the security of a tangible asset, the potential for regular income, and the chance of long-term appreciation. But as any seasoned investor will tell you, property doesn’t exist in a vacuum. Returns are shaped by a web of economic factors – some local, some global – that can tilt the balance between a profitable investment and a struggling one. Understanding these drivers isn’t just a

nice-to-have skill. It’s essential if you want to navigate market cycles, protect your capital, and maximise your returns.

1.  Interest Rates and the Cost of Capital

Perhaps the single most influential factor in property markets is interest rates. When rates are low, borrowing becomes cheaper. Investors can secure mortgages at affordable levels, yields look attractive compared to savings accounts, and demand for property rises. We’ve seen this dynamic in play for much of the past decade, fuelling growth in both residential buy-to-let and commercial property markets. But the pendulum swings both ways. As central banks raise rates to combat inflation, debt servicing costs rise. For leveraged investors, that directly erodes monthly cash flow. For new buyers, higher mortgage payments can make deals that once looked viable far less appealing. The lesson? Always stress-test your investments against rate rises. A deal that only works at rock-bottom borrowing costs isn’t truly robust.

2.  Inflation and Real Value of Returns

Inflation is another economic force that quietly shapes property returns. On one hand, property is often viewed as an inflation hedge. As prices rise in the wider economy, rents typically follow, helping landlords maintain real income. Over time, the asset itself can appreciate in line with or above inflation. However, high inflation also means higher costs – maintenance, materials, utilities, and financing all become more expensive. If rental income growth lags behind rising expenses, net returns are squeezed. Smart investors track not just rental income but the real return – what’s left once inflation has taken its share.

3.  Employment and Wage Growth

Tenant demand is fundamentally tied to the health of the job market. Areas with strong employment opportunities and wage growth attract people, drive demand for housing, and support higher rental yields. Conversely, when unemployment rises or wages stagnate, tenants feel the squeeze. Rental arrears increase, void periods lengthen, and downward pressure on rents can follow. For investors, monitoring employment trends in specific cities or regions is as important as looking at property prices. Properties located in diverse economies with multiple industries (think Manchester, Birmingham, or Leeds in the UK) are often more resilient than those tied to a single employer or sector.

4.  Supply and Demand Imbalances

Basic economics tells us that supply and demand set prices. This applies just as much to property as to any other market. If demand for housing is high but supply is restricted – due to planning regulations, construction slowdowns, or demographic growth – values and rents rise. Investors in such markets often enjoy robust returns. But oversupply tells a different story. New developments can flood the market, especially in city centres, putting downward pressure on rents and increasing competition among landlords. Before investing, it’s worth looking beyond the glossy marketing brochures to ask: Is this area under-supplied or over-built?

5.  Government Policy and Taxation

Governments have a huge influence on property returns through taxation, subsidies, and regulation. Stamp duty changes, mortgage interest relief restrictions, licensing rules for landlords, or new regulations for short-term rentals can dramatically alter the financial landscape. Even well-performing properties can see net returns fall if policy changes eat into margins. Investors who keep up to date with government policy – and adapt their structures accordingly – are better positioned to protect their returns. That might mean working with tax specialists, exploring limited company structures, or diversifying into strategies less impacted by regulatory shifts.

6.  Global Economic Shocks

Finally, we can’t ignore the role of global events. The 2008 financial crisis, Brexit, and most recently the COVID-19 pandemic each reshaped the property landscape in profound ways. Tourism-reliant markets struggled during lockdowns. City centre rental demand dipped as remote working took hold. At the same time, suburban and regional areas saw increased demand. While no one can predict global shocks, resilient investors build flexibility into their strategies – whether through diversified portfolios, contingency reserves, or adaptable property uses (for example, properties that can pivot between serviced accommodation and long-term lets).

What This Means for Investors

Economic factors affecting property returns aren’t static – they evolve constantly. But by understanding them, investors can move from being reactive to proactive. – Stress-test deals for interest rate rises and cost increases. – Track local employment trends to spot resilient rental markets. – Balance your portfolio to include areas with strong fundamentals and different tenant bases. – Stay agile in response to policy and regulatory shifts. – Plan for the long term, remembering that property is a marathon, not a sprint. At Akoya, we spend a lot of time educating clients and investors on these very issues. The goal isn’t just to source or manage properties – it’s to ensure that every decision is made with a clear understanding of the wider economic context. Because while we can’t control interest rates, inflation, or government policy, we can control how we prepare, adapt, and position ourselves to thrive in any market cycle.

Final Thought

Property investment is as much about economics as it is about bricks and mortar. Returns don’t just come from the property itself, but from the world around it. The investors who succeed aren’t the ones who chase every opportunity – they’re the ones who understand the forces shaping returns and position themselves ahead of the curve. If you’d like to discuss how these factors may be affecting your portfolio, or how to build strategies that thrive in changing conditions, feel free to connect or drop me a message.