Copyright © 2008 Property Match (UK) all rights reserved

Pre-amble:

It should be stated at the outset that whilst we are not against the idea of estate agency as a service, we advocate an urgent review of the way estate agents fees are both calculated and collected.

It appears that neither estate agents themselves, nor the professional bodies that support them are prepared to consider making the necessary changes to their methods of fee charging. These are outdated, now that the government uses percentage rates as the only available tool to control inflation. The main problem is that percentages charged on house prices have a dangerous inflationary side effect on the whole economy.

Mainstream economists have traditionally argued that house price rises are because of increasing demand.

They add that the numbers of 'households' in the UK are increasing at a faster rate than the number of properties being built.

They note also that the increasing availability of credit is causing people to borrow more, to pay the higher purchase prices.

Finally they say that as long as unemployment stays low, and interest rates don't increase too much, there won't be a property price crash or even a slowing of the rate of increase - anytime soon.

But I would like to point out that these two factors are themselves dependent upon Sterling not weakening and inflation not running out of control so this explanation isn't quite as straightforward or as reliable a way of forecasting future events as it may seem. There are several additional fundamentals to consider which have extremely important effects.

Among such variables are:

1. Cheap goods imports which help to increase the net available wealth of the house-owning community.

2. A cap on immigration (especially illegal immigration) to stop this from artificially holding down wages as well as adding further pressure to the housing market.

3. Global inflation / global liquidity, that is; whether or not eastern and developing economies continue to expand and buy goods and services from our economy - or not.

4. The measure of broad money supply in the UK, or M4 to give it is economic name.

This was growing at a rate of around 13% over the year to April 08, which is a pretty hefty rate of growth, risking fueling further inflation.

5. Oil prices.

With stagnation and inflation staring us in the eyes in 2008, a re-appraisal of economic tactics is clearly warranted.

Whilst I agree with most of the points that mainstream economists make, I would argue that the housing market is in fact a micro-economy within the whole UK economy and if it had been more carefully managed over the past four or five decades, things could have been far better than they currently are.

The current situation is that many, possibly the majority, of working people (especially key workers) cannot actually afford the houses they need right now, whether new or old ones; yet these are the same people that are said to be causing the increase in demand which the economists say is the reason for house price increases. Clearly something does not quite add up here!

The main argument for regulation:

My theory of the reasons for booms and troughs in the housing sector, is that the following are in fact the 3 main causes of inflation within the housing micro-economy:

A: The inappropriate availability of mortgage finance (until recently), combined with

B: The general deception about current property values, which are still often misquoted by estate agents.

In truth estate agents are invariably reluctant to advise clients about true market conditions when taking initial instructions, since to do so may cause them to loose that instruction.

Over valuing is the obvious path for estate agents to take to secure their initial instructions. In any case, they should want to talk the market up in order to maximize their own commission-earning ability. This is of course done in an extremely subtle way but in fact it has a very significant effect on the housing market as a whole. This practice needs reviewing urgently. The lack of affordability that we are currently seeing, especially amongst key workers, is absolute testimony to this.

To date, no-one seems ready to deal with this problem even though programs like BBC Whistleblower have brought some very undesirable practices among estate agents into the public domain quite vividly.

C: Thirdly, the reluctance to move on behalf of sellers themselves, owing to the above difficulties, plus the current high cost of moving which further exacerbates this.  Moving costs are running at an average of £10,000 per move in the UK.  These factors act to worsen the supply shortage.

This reluctance to move, coupled with uncertainty about house price levels themselves, becomes a dangerous self-perpetuating obstacle.

What is so important about C: is that the reluctance to move is a negative feedback loop. In other words, as it takes hold, the effect becomes self-increasing. This generates potentially powerful and unpredictable results which are extremely difficult to counteract.  It is this final scenario which is responsible for turning the market from a boom, towards becoming the next crash.

The net effect of these forces is a reduction in the number of properties being actively marketed at any one time and it is this lack of supply of property for sale which initially causes rising prices but these, of course, become unpredictable later on.

This was what has happened at the end of 2007.

An important thing to notice about the whole matter is, that as a result of all 3 of the above factors, there is uncertainty about just how much those who want to sell are going to have to pay to buy their next property.

The percentage problem:

Estate agents customarily charge around 2% for every pound they get on the price of the each property sold. Therefore, if they err, they would naturally tend to err on the side of price inflation in all negotiations between the seller and any buyer.

As a group, estate agents are naturally reluctant to change the basis of charging clients from the century old percentage basis, to a modern fixed fee basis.

This must change.

It is also important to note that if agents expecting to be paid by vendors, are also involved with getting paid for arranging finance for buyers, a conflict of interest arises, since the buyer is not their client in agency law and neither is the finance company.

Although getting more for the property which they are instructed to sell helps the vendor-client, this is no defence for those agents who earn a percentage of additional fees on the back of the buyer's increased borrowings (earnings on the sale of loans by lending institutions).

In my opinion we must hope that something is done to address these important issues right away. If not, the current uncertainties coupled with cyclical peaks and troughs in house prices must continue and; we have undoubtedly moved over a big peak right now.

I therefore advocate a review in the way houses are bought and sold within the whole of the UK; even though this runs against the general consensus within the property professions.

Tertiary arguments:

When there are more buyers urgently wanting to buy than there are houses or flats available, the buyers themselves expect that for every reasonably attractive house or flat that comes onto the market, there will be half a dozen other buyers willing to put in offers almost immediately.

Estate agents have been caught playing on such buyer vulnerability by getting increased offers, even though there are actually no other bidders currently making offers. The motivation for doing this is the percentage they will earn from achieving a higher price.

Unfortunately this situation makes sellers reluctant to try moving, for fear of not finding anything they can afford to buy.  This is the crux of the problem and it is a self-perpetuating one, which becomes extremely damaging to the market.

Urgent steps need to be taken to stop this cyclical market destabilization from continuing.

Defining lack of supply:

Without a sufficient number of houses being offered for sale, the housing market suffers from a lack of supply.

It is this, rather than the lack of overall numbers of houses in the housing stock that affects current market price.

Put another way, the main factor affecting current market value at any one time is the number of houses people are willing to place on the market for sale, not the total number of properties in the whole country at the time (the housing stock) as suggested by some economic commentators; although these are related of course.

"We have got to be absolutely clear about what constitutes housing demand and supply".

My proposed definition of 'supply' of houses offered for sale in the market is:

"The quantity of other similar properties currently available for purchase in that location".

Knowing how many million houses there are in the country is academic. Knowing that the rate of increase in demand is faster than the current rate of increase in overall supply of new housing across the nation is even more academic! These factors, although not irrelevant in themselves, are not what actually affect individual selling prices in the moment, at specific locations.

What also has an influence on them however, is the lack of reliable information about the current state of the market for each property-type being offered at a specific location.

For as long as the market is distorted by misinformation and scare-mongering, people will be sufficiently reluctant to move house, so causing a supply issue.  They will wait until they become forced to move and this also tends to make such people much too vulnerable.

Such contrived and imperfect market conditions are unacceptable today, since they guarantee that price fluctuations will continue to dog the housing market.

Whilst it would be correct to say that building lots of new houses would help to stimulate the economy, this alone won't have much effect on lowering current levels of house prices and may in fact increase them over time, because of stimulation of the whole economy; though in the USA this policy recently had unexpected and disastrous consequences.

Until sellers are given the support needed to market a house with the confidence of knowing what price they should achieve, they will tend to remain reluctant to trade.

Historically, in addition to the above, buyers have been too susceptible to being goaded into paying unrealistically high prices, assuming sufficient mortgage finance was made available to them. They are extremely vulnerable at such a time and most tend to believe that house prices will always go up, especially in the long run. This is a mistaken belief, especially in the short run, and can have extremely damaging consequences.  Anyone being objective should accept that house prices can (and do) go down as well as up.

Lack of available information:

Purchasers, in the past, have had to rely on whatever information they can get about recently concluded sales, if they were to make informed decisions about proposed purchases. Much of the available information was suspect and came via the vendor's agent!

Exact information has not been available to them until fairly recently, when the Land Registry started to make the terms of recent sales publicly available on the Internet.  Even now, lack of use of such information continues to pose risks, unless and until new measures along the lines of those advocated here can be introduced.

CONCLUSIONS:

Unless agent's fees are pegged to genuinely competitive levels, unconnected with house prices themselves, we are going to continue to suffer booms and slumps in the housing market on a cyclical basis.

The important spin-off, if this revision can be achieved, is that by smoothing the rate of change of house prices, more certainty will result and people will know more accurately what their individual property assets are worth. This would have a very significant stabilizing effect on the whole country's economy.

House prices themselves are below the line when it comes to keeping the economy competitive for exporting, so keeping them stable must help.

In other words, if house prices spike too often, this will have an adverse affect on national economic competitiveness and the converse is also true.

 

In defence of estate agents in general, it ought to be said that, as with all walks of life, the majority of workers would like to be law abiding and fair.

It is the unscrupulous ones who are the culprits and one thing we should emphasize is that by adopting our proposals, honest and law abiding estate agents would not be hurt. Only the unscrupulous ones would be affected.

On this basis honest agents should not object to these proposals, because if their unprofessional colleagues could be taken out, their honesty and integrity would be enhanced and their business potential and good reputation would be increased.

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I myself have little if anything to gain if percentages were outlawed, as if the housing market began operating more efficiently and professionally Property Match as an online alternative would potentially be less useful because it would not be able to compete with a more efficient estate agency sector.  We are not proposing these new measures in order to benefit our business in some way but simply to help the housing market to function better.

If anyone wishes to discuss matters such as these, or simply wishes to comment, please email me using our contacts page and I shall be pleased to explore these matters further.

Peter Hendry

Advertising Manager

Property Match (UK)

A surveyor with over 25 years experience working in the housing sector, buying and selling houses himself, supplying professional mortgage valuations, Home Buyer's reports, full Building Surveys and providing general advice to many people during their buying and selling process. I have lobbied both RICS and the NAEA about these issues but so far neither have been keen to discuss any of them.

Perhaps it is obvious why?