🏦 Monetary Shock: The Interest Rate Crunch

Thursday 16th December 2021

The End of Cheap Money – Base Rate Hikes Put the Brakes on Buyer Confidence.

The Bank of England announced its first increase in the Base Rate since 2018 on December 16, 2021, raising it from 0.1% to 0.25%. This marked the beginning of a sustained, aggressive hiking cycle that continued throughout 2022 and into 2023, with rates eventually passing 4% by Jan 2023.

While the materials crisis (Headline 2) hammered our Cost figures, the rising interest rates crushed the demand side of the equation. As builders, we rely on buyer confidence, and the cost of money is the biggest factor in that.

Mortgage Shock: The subsequent hikes throughout 2022 meant that homeowners with fixed-rate mortgages coming to an end faced potential payment increases of hundreds of pounds a month. This made many households nervous about taking on further debt for a large extension or renovation. The RMI sector, which relies on consumer borrowing power, felt the chill immediately.

Developer Impact: For large housebuilders, higher rates drastically increased the cost of their development finance, squeezing margins and making large, multi-year projects less viable. This led to project delays and cancellations, further shrinking the overall volume of work in the sector and contributing to the labour bidding war (Headline 3) as fewer new jobs started.

Our Opinion: This economic reality was necessary to combat inflation, but the transition from a decade of near-zero rates was brutal. The sharp drop in transaction volumes in late 2022 was a direct result. We adapted by focusing on clients with strong equity or cash reserves, but the pool of potential new-build and major extension clients shrank dramatically.

Debate Point: Did the Bank of England keep rates too low for too long during the pandemic (2020-2021), contributing to the subsequent inflation and requiring a shock-therapy rate hike cycle that severely damaged the housing market?