That Interest Rate Increase: An Initial ResponseVTurner
It finally happened! The first base rate increase in a decade. We’ve all been talking and worrying about it for so long that yesterday’s news, however predictable it might have been, was nonetheless really quite an event. What’s more, with the Monetary Policy Committee signalling two more rises over the course of the next three years, it’s clear that the era of dirt-cheap lending is gradually coming to an end.
But what does this change mean? Is it really as terrifying for big-ticket purchases as we might fear? What next for the UK property market?
The most obvious point to make is that the adjustment is being made in response to an existing, deepening financial situation. Famously, the looming prospect of Brexit has had a substantial impact on the value of sterling, which in turn is pushing up the cost of imports. The UK runs a significant trade deficit, with the most recent data (August 2017) showing that we import goods and services worth £13.2bn more than those we export. In this context a sizeable drop in the value of our currency will inevitably have an immediate and significant impact on the cost of daily life for consumers across the country. If this base rate rise and those planned over the next few years can help to keep inflation within tolerable levels, then of course their net impact on the UK property market will be overwhelmingly positive.
One factor being pointed out far and wide is that not all of this rise in the cost of the banks’ borrowing will be directly passed on to the banks’ customers, or at least not straight away. The rise has been so long in coming that it is already reflected in the cost of fixed-term mortgages that have been on the market for some time. Moreover, 60% of UK mortgage borrowers are on a fixed rate so will not be impacted by this change at all, and will of course be quietly delighted that after years of gloating, their friends on trackers will now begin to pay slightly more.
It’s also worth highlighting that even where it is passed on in full to those borrowers on a tracker mortgage, this initial increase will have a relatively small impact on their monthly outgoings. Various estimates suggest that the monthly additional cost of a 0.25% rate increase on the average tracker mortgage will be just £17 per £100k of outstanding mortgage debt.
Lastly, we should keep in mind that although this is the first increase seen in ten years, and whilst it does clearly mark a change of policy for the Bank of England, the UK base rate was 0.5% as recently as August 2016. This week’s increase is not quite the epochal sea change that the casual observer might assume it to be. In the wider picture, it’s also still monumentally low. Today’s first-time buyers might be surprised to learn that the base rate was as high as 17% at the start of the 1980s.
For all that this isn’t really anything new it is still a change, and a change that has been extremely well documented by the UK media. In some regards the public conversation about borrowing that this inspires might be of significant value to the UK property market or to big-ticket vendors in general. Today we find ourselves in a situation similar to June 24 2016: yesterday the unthinkable happened, and today the world is still turning. Many potential first time buyers might find some new confidence in the certainty that this rate increase has given them. Today they have a more accurate understanding of what their borrowing is likely to cost them, and with the era of cheap mortgages (slowly) coming to an end, they may feel compelled to jump into the market feet first.
However, should one materialise, what are the likely outcomes for marketing within a tighter property market? As was the case after the last recession, any eventual market downturn is likely to be a catalyst for substantial change within the average media schedule, and that change will inevitably and necessarily be for the better.
Alongside the quest for newer, more cost-effective routes to market we must also hang on to those tried and tested tools that continue to work well, and ensure that we continue to use them to spell out what distinguishes new homes from the second-hand market. In this context there will always be a place for a recommend-a-friend incentive, for understanding the problems at hand and crafting exactly the right deal for that sticky plot.
The imperative to exact all the possible value from every last lead will be stronger than ever: a first-rate, leak-proof CRM process will be essential. When leads are harder to come by, a failure to get in touch with an online enquirer is surely unforgiveable. Beyond squeezing each lead as a potential sale, we must also understand the wider value of every piece of data we hold, and extract and then act upon all the insight that it yields.
Media mix must also reflect the strengths and the strategic objectives of the housebuilder. If the size of our market is limited by the economy and by the average person’s misconceptions about their financial capacity to buy a house, then we must promote our enablers out of market. The importance of having a broad reach will be uppermost for many advertisers, where in a more successful market we might instead have the luxury of focussing more narrowly on in-market consumers. Or put another way, in a downturn there is little point in only talking about Help to Buy to a Rightmove audience: it might well be of interest to any number of people who do not realise that they can afford to move.
We must be prepared to market not just those outlets that drive most of our sales or those that need the most help, and develop strategies for everything in between. In a tighter market, every site is potentially a focus site.
Ultimately though, it’s easy to read too much into a minor shift in the cost of lending. The wider market indicators signal a lack of substantial growth, but generally prices are still, just, moving in the right direction. This is an industry in vigorous health. With the appropriate state support and with the right marketing strategies, it is well placed to survive whatever the economy can throw at it.