Why crashes are bad for estate agents, but good for investors
Posted by markharrison on April 17, 2008
Over the last three years, I’ve had a bit of a poor reputation on the speaking circuit, for reminding people that there was going to be a housing crash. Others, it seems, have made a good amount of money by preaching that houses and flats only go up in value.
There are some good lessons, however, to be learnt from the 1989-1994 property crash. I’ve mentioned before that calling it the crash of 1989 misses the point – it took about 5 years to work through the UK, starting in London, and then radiating out.
My analysis is that UK housing crashes are caused by a drying up of demand, not a change in supply.
What tends to happen in a stable / slowly rising market is that estate agents have a “book” of properties – maybe 40 at a single-branch agency, and they sell maybe 10 per month. As they sell, more come in the door, but the number of properties actually sitting available to buy stays relatively static.
At some points in the last few years, the number available fell – as soon as things came on the market, they were snapped up by buyers – indeed, at one point, my local agency had but a single 2-bedroom house (a staple in our area) on the market.
Then comes something that triggers buyers to stop buying. I’ll come back to that trigger in a moment.
When buyers dry up, the turnover of the agency (and thus their commission) goes down. Agents don’t do poorly in a crash because houses have gone down 10% and therefore they’re only getting 90% of the commission they used to… they do poorly because rather than selling ten houses this month, they sell one.
Indeed, one of my mentoring clients mentioned last week that an estate agent friend of his has sold nothing for three months.
This isn’t a 10% fall in his income – it’s a 100% fall in his income.
In stock markets, when buyers get scarcer, prices tend to fall – in some cases, very quickly – we all know of the famous Black Friday when the UK markets fell 40%.
In property markets, what tends to happen is that owners decide to not sell, rather than selling at 10% less than previously. However, because of the way that averages are calculated, if only one person is selling, and (s)he sells at 10% less than the property was worth a year ago, it looks as if prices have gone down 10%. This has an impact on the buyers, reinforcing their wish to not buy… and things go on for, well, years
Fantastic news for investors – we know that most potential buyers will hold on, rather than sell, and estate agencies fill up their “books” (or rather, their filing cabinets) with not 40 properties, but 50, then 60, then 70 as more people decide that they’ll try to sell…
… some of these people hit a point where they then feel they must sell, either because their circumstances have changed, or because they get even more paranoid about further crashes – and that’s where you get back to the situation we had when I started as a investor – when I could buy an average flat, rent it out, and make a profit.
Now, I promised I’d come back to that trigger. In the past, it’s been mainly psychological – buyers thinking that now is a bad time to buy. If that mind-set takes full hold, then we can expect to see several years of price declines.
But at the moment, it’s different – there are buyers out there, but what’s locking things up is the mortgage lenders, who are either raising rates, or closing doors to new customers, or both. According to some analysis I’ve seen, there’s about £60billion “missing” in terms of extra liquidity (cash) that would need to go into the markets to start lenders being willing to lend again.
And that’s why the Government’s innovation in MBS (see yesterday’s post) may well be a good thing for the estate agents – it might be enough to get things moving again.
But ask yourself… if you’re investing for property with a 20-year timescale, wouldn’t a nice crash over the next few years be a great thing for your pension?
[Some parts of this post come from my new book – “How to make money in a property crash” – due for publication later in 2008.]