Veteran, retired agent John Durrant’s priceless advice for estate agents navigating a property market downturn
This is a reproduction of a post from 23rd August 2022 by John Durrant on LinkedIn (with his kind permission):
I suggest you read about Anthony Barber, Chancellor from 1970: https://en.wikipedia.org/wiki/Anthony_Barber (especially the section headed, Chancellor of the Exchequer).
Compare the [1970s] boom that he created with the false market that Rishi created by his well-meant but totally mad Stamp Duty Holiday idea.
Broadly speaking, at its most basic definition and within normal margins, stock always remains relatively constant, and demand always remains relatively steady too. Stock supply is boosted to a small degree annually by building new homes. Demand remains relatively level but varies a little according to earlier years’ birth rates, deaths, immigration, emigration, and so on.
You’re thinking that we’ve just experienced shortage in supply of homes for sale and a massive increase in demand. But what you in fact witnessed was the result of human behaviour coupled with a set or cyclical economic (what goes around comes around) circumstances that helped to drive that.
So, if supply and demand did not change then what did change was Effective Demand and let’s call it Effective Supply.
Effective Supply
Effective Supply reduces when economic conditions cause vendors to think that they won’t put their own home onto the market because:
- ‘there are no homes available’ for them to buy (how often do we hear that as agents?). Fear of being left homeless. And
- when they think that they’ll get a better price by waiting. Greed.
What caused the decrease in Effective Supply?
Rishi’s Stamp Duty wheeze was, in my view, well-meant but it was always destined to cause issues down the line. It brought forward the life plans of thousands of people – people who had planned to move several months later but who saw the opportunity not to pay Stamp Duty just by bringing their plans forward.
Suddenly, this meant that houses that would have come onto the market at a later time, had already been sold and, this in turn created an ongoing vacuum – in other words, Rishi’s Stamp Duty policy resulted in a very low effective supply of homes being offered for sale.
People who wanted to move after the vacuum was created found, (as above) that because of the vacuum a) there was very little choice for them to buy and b) prices were rising. Those people, not unreasonably, chose not to put their own homes onto the market and so the vacuum became self-sustaining and to a certain extent it still is. It will likely remain so until the penny drops that supply is increasing and prices are easing. That will encourage more vendors and then there will come a tipping point. That will be the ‘oh my God’ moment that we all should be preparing for.
The shortage in supply was an illusion. The homes had not suddenly evaporated, people just weren’t putting them onto the market – buyers panicked – the false market was created.
What I didn’t know until February was that there would be a war in Ukraine that would exaggerate what would happen next and bring it to a head in much the same way that the Yom Kippur War did in 1973. The property version of a perfect storm.
Here’s a report from 2007 that refers to 1973 and the devastating effect that the Yom Kippur war had on our property market back then. https://www.theguardian.com/business/2007/sep/14/money.northernrock3 It’s worth registering (free) with The Guardian just to read it. Note the similarities between then and now. House price inflation (artificially created), war, energy shortages and so on.
My personal experience was that over a period of 15 – 24 months we went from 400 listings to 6, then came the war and we ended up at 600! Mostly these were overpriced homes because the market tipped and this created a rapid increase in effective supply. Eventually, we were ordered to dis-instruct ourselves from many of them where vendors were unwilling to adjust their prices to suit the sliding market. Over time, this action helped to steady the market. Tough love caused vendors to realise that we weren’t being difficult – we were simply reflecting the reality of the new market order. This had the effect of eventually reducing effective supply and over time the ship came back to an even keel.
In retrospect it would have been better to have known what the market was going to do and to not have spent money on marketing those homes that had too high expectations of their selling price.
When the market slides, the best any agent can advise is to adjust the price quickly. In a few weeks, clients can find they’ve lost another 5% or whatever. You won’t be doing them any favours by telling them to wait. It will be some time before the market finds its equilibrium. Chasing a sliding market down is not the fun it sounds like you’d have at the fairground.
When to do this is the BIG question. Personally, I’d have been preparing my vendors months ago, hoping for the best but preparing for the worst. Keep an eye on the media.
Here’s one headline from the Telegraph a couple of days ago: “A ‘tsunami of repossessions’ will hit house prices” and put yourself into the shoes of buyers reading it. What you will find is that many vendors will think that their properties won’t be affected! But take my word for it, they’ll be happy to apply the logic to the ones they’re hoping to buy. Don’t be surprised when that happens.
Effective Demand
As above, demand always remains relatively constant at the most basic definition of what it means. That’s because everyone needs to live somewhere. The population doesn’t vary much. The need to move does.
What changes is financial ability and buyers’ perception of what’s happening in the property market.
Effective Demand increases with the availability of affordable money and when buyers can see that the market is moving up – nobody wants to miss the first rung of the ladder.
The issue currently is that if we assume everyone throws the kitchen sink into raising as much as they can to buy their home, when something happens to add £400 a month to the household budget, they will have to cut their cloth somewhere. The choices are stark, afford to eat, heat, and pay your mortgage but effectively do it with £400 a month less than you thought you had.
With household budgets up £400 a month (energy and food) there will be less money available to fund mortgages. At 3.5% over 25 years, that £400 a month would have funded £80,000 and over 35 years that would have been £98,000. If they choose to eat and heat, they’ll have up to £100,000 less than they would have had available to make their purchase! Many will compromise in the and eat a diet of handouts from parents and turn their heat down to 19 degrees. Many more will choose not to move away from parents I the first place. A property market without FTBs is not viable.
IF/WHEN the tipping point is reached, expect lenders to become nervous too. They’ll be looking at affordability and even if buyers decide to go on a no-food diet and freeze to death it’s unlikely that the lenders will accommodate their wishes to buy a home at current price levels. Demand is only effective when there is money available. If interest rates increase, then affordability will fall further. Lenders are likely to become a problem – although the rate of mortgage lending hasn’t been high of recent so they might be slow to respond.
The trick will be for agents to see the writing on the wall. Keep your eyes open and your wits about you. Don’t take houses onto your books and spend your money on marketing them if you think that the price is too high for today’s market, but it MIGHT sell at an inflated price next month. Pricing in house price inflation will lead to you wasting your money and you may be better off putting it on an outsider at William Hill.
Remember that if you keep light on your feet you can get through what is likely to come. Data will be the secret weapon that we didn’t have back in 1973. Neither then did we have anything like the experience of anything similar happening 50 years earlier. It was the first time any of us had experienced anything like it.
The temptation will be to draw your horns in and forget that your primary job is to market and sell property. But the best way to attract the best buyers will be by having the best houses to sell on your books. This means that you MUST keep doing what you do but don’t try to be a vendor-pleaser by overpricing their property. If you lose instructions, you’ll very likely get them back several weeks later.
Make sure that you make a big thing about not tying vendors into long-term sole agency agreements. Point out that many agents will try to tie them up in this way to set a high initial asking price and then chip away at it. Vendors won’t like that, but they won’t be able to sack them unless they’re taking the house off the market altogether.
To my mind, the most professional agents, those with heart, courage, experience and sharp wits will come out of this stronger than they went in.
All of the above is my personal opinion and is based on my personal experiences of fluctuating property markets over the years.
If anyone wants to chat, they can email me at jndurrant@gmail.com with some times for me to call, and a phone number. Good luck everyone.
ENDS.
Watch a conversation on this topic between John Durrant and BestAgent founder Charlie Lamdin here: https://youtu.be/ChEv_5qU0kY
