Canada has been going through two very dramatic housing price spikes, one in Vancouver and one in Toronto. In the past year, Toronto has appreciated +25% while Vancouver, even with a year of a foreign buyer’s tax is up 10%. House prices used to more or less track the rate of inflation, but clearly these two markets are marching to the beat of a different drum.
So with this huge input of cash and credit going into housing, where’s it coming from and is it suppressing spending in other categories?
Are consumers, swamped in mortgage payments, deferring discretionary purchases like cars, appliances, clothes, trips and restaurant meals so they can cover their nut?
There are two groups of buyers: the first is the ‘home life buyers’ who have dreamed of owning a home and building their lifestyle around it; the second is speculative investors trying to capitalize on the real estate boom or park capital in a safe market haven.
Home life owners are important to us as marketers because they are typically first-time or move-up buyers willing to spend large amounts of their discretionary income on consumer goods & services to facilitate their dream and lifestyle.
Logic would suggest that given the size of their mortgages, this group would be maxed out financially with little left over to spend on lifestyle.
Oddly, the evidence seems to suggest the opposite. In 2016, consumer spending in Canada was actually led by Ontario +6.24% and British Columbia +5.87 % versus a national average of less than 3%. While clearly not all this consumer spending bump is related to people with big mortgages, there are important rational and emotional factors driving spending that we should consider.
The emotional side:
- Rising house prices create optimism in the overall strength of the economy and therefore give consumers confidence to spend on discretionary goods – “I may be a little strapped but if the economy is going well that’s going to be good for me.”
- “The market is up so I’ve made at least 25% on my house!” This is a paper gain, but consumers will mentally calculate their paper gains as if they were real, feeling richer and believing they can afford to spend more.
The rational side:
- Their property is a financial back-stop, making them feel secure about borrowing more.
“In the worst case I can always sell my house and pay down my debts.” - Banks want to lend more and are offering to extend larger lines of credit based on the increased value of the house, which becomes “free money” owners feel they can spend on other lifestyle items.
Look at how this played out in the UK in the 2000’s. When housing prices were soaring they added £14 billion each year to consumer spending from increased home equity. However, when the market tanked, £26 billion was wiped off the home equity market contributing to a very severe recession in that country.
So while consumer spending will likely continue to increase in step with the property market, there is no soft landing for consumer spending when the market turns. The house becomes the hardest asset to unload and discretionary spending becomes the easiest expense to curtail. It’s much easier to cancel a trip, dine at home or break a car lease than sell a house. And all those items have less emotional attachment.
So when the times are good, many brands can be marketed with emotive messaging based on consumer wants that build brand affinity and love.
When the market turns, consumer wants turn into needs and the brand message has to be more rational based on value attributes that align with their mind-set.
A high-end automobile may be marketed today based on its superior performance, an implied badge status, appearance and the price of the vehicle. When times get tough, however, the message needs to pivot so that it’s more about the enduring value of the vehicle, favourable financing rates and its reliability.
A fashion brand, which is all about the contemporary design, the label, the style and cut, might shift in tougher times to focus on the quality and durability of the garment, its value and enduring look.
So as marketers we need to keep a weather eye on the horizon and look past the euphoria of the property market so that we are prepared to adjust our messaging when the market turns, which inevitably, it will.
Ted Nation is the President of Yield Branding, a Toronto-based branding agency that specializes in FI and professional service clients, as well as consumer challenger brands. His early career was spent largely with multi-national agencies, both in Canada and overseas
