There is much talk recently about the likelihood of a fall in house prices. Estate agents and surveyors have said that there has been a dropping of prices recently, as buyers are keen to secure some sort of discount to make themselves feel a bit better about buying a house when the future direction of the economy is so uncertain – especially in London.
One thing that is clear is the supply of houses, that people actually want, is not enough to allow for social mobility and family stability at the same time. With such a low supply, even if demand softens, it is expected prices won’t be affected too much. But what if there was a significant correction – would Foxtons go bust?
The fact is, estate agents are very unlikely to go bust for a number of reasons.
Their fixed costs are ludicrously low – OK, they have to have an office and some phones but that is really all is needed. Office costs can be quite low as they tend to cluster together but are not necessarily in the most expensive part of town as they do not need a smart address. Much of their presence is online now.
Variable costs are very very variable – Estate agents get free advertising in the form of the ‘for sale’ boards and they only pay high advertising costs if they have lots of stock on their books. They also only pay for actual houses advertised online and in newspapers. However, the main thing is the remuneration. Estate agents will be getting minimal basic pay, with the vast majority of their earnings being in commission. When sales start to drop, the headcount/wage bill can be reduced dramatically and very quickly.
This does work both ways as when the market is very active they can take on staff quickly, so it is a bit of feast and famine. It is worth noting it can take many years for an estate agent to establish themselves in an area and many of them have seen booms and busts in the past, so rather than going for some big expansion, they tend to spend the money personally and save a chunk for a rainy day.
It is really the level of transactions that is a worry because estate agents will make money in a falling market if everyone rushes to sell their property. This causes volumes to increase, hence commissions. In some cases, more money is diverted into estate agents as people get desperate and use “joint agency” to try and shift a property. When it does sell, both agents get a commission even if the other one doesn’t find the buyer!
Of course, the other area of the property market is lettings, which can help smooth out any peaks and troughs in income. People will always need somewhere to live so unless we decide to live in tents then estate agents will stay in business.