Building back differently

Building back differently

Tim Hague is director of Sagis

The rather wet month of May may well have been notable for the record breaking amounts of water that descended from the heavens, but even that did nothing to dampen the fright over inflation.

Prices jumped in April, with the consumer price index more than doubling from 0.7% to 1.5% according to the Office for National Statistics (ONS). Inflation in the US is far higher, at over 4%.

UK price growth, for now, is safely inside the 2% target set for the Bank of England by the Treasury and, in reality, there is no way that central bankers are going to mess with the post-pandemic recovery by throwing a spanner in to the works any time soon.

Economics is about people. People have been stuck at home for a year, and the lucky ones have had nothing to spend their money on, so they’ve saved it and paid down their debt with it. Now people are allowed to go to the pub and to see their families, and – traffic light confusion notwithstanding – on holiday.

There is about to be – and may well already be when you read this – a massive spending spree. This will push up inflation and is going to pose some very tricky problems for the Monetary Policy Committee (MPC) to manoeuvre. It’s also likely to underpin demand in the housing and mortgage markets.

We spend much time pointing to the end of the furlough scheme in October, worrying – rightly – about those who will lose their jobs and struggle financially. But the pandemic has brought more than tragedy and a year at home. It’s woken us up.

During this period, we have all become more familiar with and comfortable using technology in new ways. Low interest rates and the Funding for Lending Scheme extension means that many lenders can afford to invest in this digital future – probably more so than many of us realise. Other resources might be problematic, but financial ones less so at the moment.

Building societies in particular are awash with savings balances, which will have a negative impact on profit if they cannot lend them, so lenders are falling over themselves to lend, but in a narrow criteria-led pond framed by concerns about job security.

Brokers will know all about this, with many having to re-broke cases as lenders that used to accept certain types of business are now declining it, often without communicating the change of appetite!

It might sound counterintuitive, but there is a sense of optimism growing, even among lenders.

Of course, they will have to manage difficult decisions faced by homeowners whose financial situations have changed, as well as figuring out their servicing capacity in a more flexible working environment. Nevertheless, many have enjoyed record first quarter lending and are well placed to make proper investments.

Now is the moment to invest in getting this right for the future.

The big high street banks have already ploughed investment into developing technology that will improve their customers’ experience. I think we’re going to see the fruits of that over the coming months.

Consumer confidence in digital banking is higher than it has been, as a result of necessity.

Competition is already fierce, and with so much money – both retail and institutional – sloshing around the economy, as well as the appetite to spend it, it’s going to get even fiercer.

At the time of writing, two lenders have already dropped their best buy rates below 1% on a 2-year fix, and I wouldn’t be surprised if others follow their example.

Competing on price for originations is not sustainable, and one strategy is to retain more customers by making product transfers increasingly easy.

This is particularly true for those borrowers facing a need to refinance and avoid a full re-underwrite. But it will not be enough.

Technology and origination is where growth lies. How lenders deliver slicker processes and improve the user experience for both the business-to-business and consumer markets is going to mark out the winners and losers over the next five years.