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“Invasion of the Estate Agents,” screamed a Sunday Times headline last week. Instantly, I had a vision of our green and pleasant land overrun by phalanxes of overly-aggressive 19-year-olds with perma-tans, pastel shirts and fist-sized knots in their ties. They marched along, staring fixedly ahead, bellowing their masters’ mantra: “Property prices can only go up.”
The truth is only marginally less terrifying. Reporter Angus McCrone had ventured deep into enemy territory, a street in southwest London that has the highest concentration of estate agents in Britain. Of the 14 shops in the patch, 13 are involved in flogging overpriced property (the sole holdout is a cobbler).
Once I stopped shaking in horror, I began wondering what this tells us about the property market and the economy as a whole. Not surprisingly, I think it’s pretty worrying.
The patch of London described in the article is exceptionally infested, but it’s a fair reflection of the explosion in the number of estate agents since the property bubble began inflating. In the last ten years, the number of people employed in the property sector has risen by 72%, as revenues trebled on the back of soaring house prices.
The Office of National Statistics says that 134,000 people work in property agencies, more than the number of soldiers in the British Army. That’s an awful lot of people engaged in a boom that frankly does not make Britain richer – it just shuffles theoretical wealth around the country but creates genuine liabilities. As Mervyn King said, house prices are a matter of opinion whereas debt is real.
But unfortunately it’s the expansion in jobs like that – and in government-sponsored non-jobs – that have accounted for much of the growth in employment in recent years. Once the property bubble pops (or deflates if we’re ‘lucky’ enough to get that soft landing), there will sadly be an awful lot of people from property sales out of work. The same will also apply to the other sectors that have boomed as a result of homeowners feeling wealthier.
But the explosion in agents also suggests that the end of the bubble may be near. Think back to the dotcom era, when everyone was rushing to work in IT and expecting to be a millionaire within a few months on the back of their share options.
Now we see the same thing in property – not just in the statistics but everywhere around us. I’m regularly bombarded with adverts telling me to train as a mortgage adviser and earn £50,000 a year. Everybody seems to knows at least one amateur buy-to-let investor, most of whom completely misunderstand the economics and risks of what they’re doing. See Jody Clarke’s recent piece in MoneyWeek for a graphic illustration of why so many buy-to-letters’ sums simply don’t add up: Don’t believe the hype over buy-to-let (/file/15339/dont-believe-the-hype-over-buy-to-let.html)
It’s when a boom becomes that obvious on a day-to-day basis that it’s clear evidence that it’s a bubble. Another classic sign in the dotcom era was the surge in takeovers and we’re starting to see that in property as well. Last year, Persimmon took over Westbury. Rumours of other bids have been rife for months, with Wilson Bowden a regular candidate. Then last week, a private-equity consortium agreed a deal to buy retirement homes-builder McCarthy and Stone.
Now, McCarthy and Stone looks like a solid business with demographics firmly in its favour. But it doesn’t seem like a sensible private equity play. It’s already well-run, so it’s not a candidate for turnaround. The attraction is surely that they can load it up with debt, which can be backed by potential cash from its large, saleable landbank, then hopefully refloat before the bubble bursts.
Remember that this is a cyclical industry where sales can drop off sharply during downturns. And, as retirees, around 85% of McCarthy and Stone’s buyers have their old homes to sell, making the firm more closely tied to the second-hand market than many other housebuilders.
For this, the private equity boys are paying a steep twice times net asset value (more if a bidding war develops). Persimmon paid 1.2 times NAV for Westbury. This probably isn’t the peak but it looks close.
Returning to our estate agents, there remains the question of why we still use them at all. To be fair, there are some good professional ones out there. But, anecdotally, they seem to be in a minority. Friends who are trying to buy or sell property, consistently talk of unrealistic pricing, complete misunderstanding of local market conditions, inability to progress paperwork quickly once deals have been agreed – and that perennial favourite, prospectuses so illiterate they read as if they’ve been translated from the original Swahili by someone who speaks no English.
For myself, as a confirmed housing bear, I rent. Privately. Without an agent involved at any stage of the process. And I think that’s the way the market will increasingly go. Look at online agents such as Halfapercent.com, or Houseweb.com, which aims to match buyers and sellers without an agent getting involved. High-street agents like to claim that they provide an all-round service that can’t be matched over the internet, but given how poor this often is, the online sites’ lower fees should steal a lot of their business.
A property market downturn, increased competition from the internet and the prospect of tougher regulation (which we freemarketers at MoneyWeek don’t welcome, but the industry has brought it on itself to a large extent) doesn’t suggest a glowing future for all those new recruits to the property industry.
Turning to the wider markets…
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The FTSE 100 slid further into the red on Friday, weighed down by commodity stocks, to end the day at 5719. Miners Vedanta, Antofagasta and Lonmin were among the worst performers, reacting to falling metals prices. PartyGaming was the biggest riser after the online betting company reported a 49% jump in Q2 revenue, beating expectations. Construction group Wolseley was the top blue-chip faller, following repeated ‘sell’ advice from Goldman Sachs. For a full market report, see: London market close (/file/15716/london-close-commodity-stocks-weigh-on-footsie.html)
Over in Europe, the Paris CAC-40 fell on profit-taking, down 46 points to 4,818 at close. The German DAX was also down 94 points to 5,451.
Across the Atlantic, the Nasdaq slipped 19 points to a 14 month low of 2,020, and a third weekly loss in a row, as Wall Street reacted to a profit warning from Dell and concerns over slowing economic growth. The Dow Jones also fell 59 points to 10868, but ended up slightly higher on the week as a whole.
The decision by China’s central bank to tighten lending hit Asian stocks. The Hang Seng ended the morning session down 37 points at 16,426. Falling metals prices and the slide on Wall Street sent the Nikkei down to 14,596.
Oil was lower this morning, trading at $73.95 in New York. Brent spot was at around $73 a barrel.
After falling to a a four-week low, spot gold was up again slightly this morning to $619.50.
And Vodafone announced customer growth of 9.5% this morning, largely due to acquisitions in markets including Turkey. However, revenue growth continues to slow as the Western European market reaches saturation. ‘We’ve seen strong growth in emerging markets and robust growth in a challenging European market,’ said Chief Executive Officer Arun Sarin.
And our two recommended articles for today…
Why buy-to-let is a bad investment
– If you bought a property with a buy-to-let mortgage when they were first introduced ten years ago, chances are you’ve seen some stellar returns. But if you’re thinking about starting a career as a property tycoon now, think again. To find out why John Stepek believes the property market is overheated, read:
Why buy-to-let is a bad investment
What Japanese rate rises mean for gold
– The recent gold price rise has been widely attributed to violence in the Middle East. But for the real reason, investors should look even further east, says Paul van Eeden, because it is Japan’s decision to end its zero interest rate policy that will have the greatest influence on the price of gold – plus the price of your house and the value of the money in your bank account. To find out more, see:
What Japanese rate rises mean for gold