Total homeowner house purchases in February reached 50,000 – the highest level for the month of February prior to the financial crash. This was split fairly evenly between first-time buyers and existing home movers. Mortgages of roughly £18bn were secured but nearly half of these were remortgages as existing borrowers locked into low rates ahead of the perceived likelihood of an increase in interest rates later this year.
However, this new-found activity could be no more than buyers coming out of a slumber in the wake of Christmas and the new year. Nothing else has changed to stimulate fresh activity, and it’s interesting to note that the increase in February came despite growing evidence that house price inflation continues to slow. And it should go without saying that too much shouldn't be taken from just one month's worth of data.
Flat trend
While a higher number of house movers must be good news for estate agents, it’s going to take more than one month’s worth of figures to reverse what has become a continued flat trend in transactional volume. There were 1.2m housing transactions in 2017 – virtually unchanged from the previous year – and there's little to suggest that this trend will change. Many existing homeowners are not prepared or cannot afford to jump onto the next rung of the housing ladder and are choosing to spend money on improving their existing homes. Older people are also sitting tight rather than downsizing. Equity release schemes, whereby the home owner receives a lump sum that is repaid with interest when the house is sold, have more than doubled since 2016, and jumped another 25 per cent in the first three months of 2018.
The hybrid threat
The problems facing the traditional estate agent include operational gearing. Rising commission income on a fixed cost basis is good, but when income falls, costs don’t, and it becomes a burden having to service a chain of high street branches and pay wages at a time when income is shrinking.
There are other headwinds to consider. Aside from a lower number of transactions, there is also pressure from online estate agents and so-called hybrid operators. The latter do more than just list your property online – they do it for a fixed price. This is important because in years gone by an estate agent could charge around 2.25 per cent commission for an exclusive contract to sell your house, while retaining the right to charge 2.5 per cent if the seller chose to use more than one agent.
That’s history for two reasons. The first is competition within the existing estate agent fraternity and the second is the onset of these online agents. Without the cost base that traditional estate agents are subject to, online agents can and do offer cheaper deals. These may look attractive but lack the broader range of services that high-street agents provide. If you want to do some of your own homework – organising solicitors, conveyancing and the like – the savings accrued by using an online estate agent are considerable. So much so, in fact, that a high-street estate agent now gets excited about charging just 1 per cent commission.
How does this all work out? Well, 1 per cent on a £500,000 property is £5,000; an online agent will charge around a fifth of this. All of this relies on there being an active market, but the bottom line is that potential buyers are becoming pickier. This is reflected in the fact that while transactional volume has remained flat, online property site Rightmove (RMV) has achieved a record number of site visitations.
Another headwind that could have a serious impact on revenues generated for estate agents comes from potential restrictions on lettings fees charged to tenants. If the proposed legislation becomes law next year, tenants will only be able to be charged for rent, deposit and contractual default penalties. Fees charged for references will be banned. Designed to protect tenants, this may backfire if estate agents turn to landlords to make up the shortfall, and the latter may seek to recoup this by charging higher rents. The legislation will act as a wake-up call, however, because landlords are more likely to shop around for the most competitive letting agent. But with mortgage interest rate relief being phased out, some more highly geared landlords may opt simply to leave the industry altogether. Others wishing to reduce costs may opt to do the managing themselves, in which case letting agents will face another drain on income. And while history has shown that introducing a cap on rents doesn’t work, other than to encourage even more landlords to quit the business, the Labour Party will be more inclined to go down this route if eventually elected.
Reversing the trend
Self-help measures such as cutting costs and broadening the diversity of revenue streams should help stem the continued profit decline, but with transactional volume expected to remain flat for the next two or three years, there seems to be little prospect of reversing the trend. Still, there are avenues to explore for additional revenue. If you can’t beat them, join them is one approach that LSL Property Services (LSL) has opted for by purchasing a 17.3 per cent stake in online hybrid estate agent Yopa. It also expanded its financial services side by acquiring Personal Touch Financial Services, with a view to expanding the provision of mortgages and other financial services. In fact, arranged mortgages were already an increasing part of the business, with £21bn arranged in 2017, up from £17.1bn a year earlier. This will help to paper over some of the cracks.
But for London-focused agent Foxtons (FOXT) the message is grim because the London property market has taken the biggest hit. Over the last four years, average sales per branch have fallen by 60 per cent.
