Now that the Negotiator magazine is back in print again, I must write my monthly article a couple of weeks before it is published. This makes me a little nervous about covering fast-moving topics but this month I am going to make an exception because this article is too important to delay.
After two years of lockdowns and disruption, we have finally, over the last few days, started to see articles about the end being in sight. I have seen an article about how we will learn to live with Covid. I have seen another one about how life will look in the future. There seems to be good evidence that this is not just another false dawn. Omicron seems to have rampaged its way through London very quickly and infection rates are already starting to fall. The evidence is also growing that it is a milder version of the virus than Delta and hospitalisation rates and death rates are much lower than many of the scientists forecast.
Let’s hope that this continues but if it does, we will need to start considering what life will look like after the pandemic and estate agents will need to start thinking about the long-term impact of Covid on the housing market and what they need to do to respond to this. My view is that the outlook for the housing market is quite positive.
The single most important factor in the profitability of an estate agency business is not house prices. It is the volume of house sales. Covid has already had an impact on the number of house sales. The stamp duty holiday had some impact on the number of house sales last year but the real driver was that Covid made more people want to move.
From the perspective of buyers, it is clear that working from home for at least part of each week is going to be a permanent option for many office-based staff. This means that they need more space to work from home, space that they do not have in their current property. It also means that they can move further from their workplace because they will only be commuting for part of each week. As a consequence, many buyers have become dissatisfied with their current homes.
From the sellers’ perspective, in addition to these drivers, there will be other factors that motivate them to sell. Some homeowners who work in industries such as hospitality or travel have been very badly hit financially by the impact of Covid. Significant numbers of these people will be forced to sell for financial reasons. The impact has been cushioned so far by government grants, bounce-back loans, CBILS loans and furlough money but now that this support is over, the number of distressed sales will increase.
Sadly, a lot of marriages have got into difficulty because people have been couped up together for two years with their partner. Divorce has always been a driver for house sales and this too will mean that the supply of properties coming to the market is likely to increase. Finally, Covid has been responsible for over 150,000 deaths and has left many more people with a legacy of severe long-term health problems. This too will have an impact on the number of properties that come to market.
Covid may or may not be responsible for the huge increase in the inflation rate. However, this too is going to have a huge impact on the housing market. Interest rates must rise soon and no-one knows where they will end up. I am old enough to remember a time when interest rates were 16%! A rate rise of this magnitude seems inconceivable but even a 1% rise in interest rates could as much as double the monthly payments that some homeowners are making on their current mortgage. This too will have an impact on housing supply.
Some homeowners will be forced to sell because they cannot afford their mortgage payments. However, this will not necessarily lead to a fall in house prices. If inflation remains at 7%, investors will not be able to leave their cash in the bank because its value will be so quickly eroded. They will therefore be more likely to invest in property because it is a hedge against inflation. This could lead to an increase in the number of rental properties, something which has been declining in the last few years.
So, how can you get ready for all this? Past downturns in the housing market have proved that it is all about timing. Just as soon as you see positive signs in the market, you need to be ready to increase your marketing budget in order to win market share. Those that act too soon will burn their money during a time when instructions are just not available. Those that leave it too late will miss the upturn.
You will need to make sure that you have the cash resources to fund this expenditure. The money that you spend on marketing now will not show in your income for six to nine months, so it will need to be funded from somewhere.
If you made an exceptionally good profit in 2021, then you should reinvest some of this in growing your market share in 2022. If you are about to repay your bounce-back loan or your CBILS loan, then don’t. This is cheap money which can be reinvested in growing your business for the future.
At the moment, most estate agents are very short of properties to sell. However, there is huge pent-up demand in the housing market from both buyers and sellers who need to move for pressing reasons and you need to ensure that your business is ready to benefit from the increased volume of transactions when the dam finally bursts.
Adam Walker is a management consultant and business transfer agent who has specialised in the property sector for more than forty years.