March 2009

Why lettings income is so welcome in this current market...

THE Council of Mortgage Lenders figures for 2008 have confirmed that it was the worst year for transactions in living memory.

Only 516,000 loans for house purchase were taken out, compared with 1,017,000 in 2007. That represents a 49 per cent fall.

The reduction was less pronounced for first time buyers, from 357,800 in 2007 to 200,000 in 2008, by my reckoning a 41 per cent fall.

But the number of loans to home movers crashed by more than 50 per cent from 658,800 to 322,200.

As the chief executive of a major estate agency chain told me months ago, discretionary moves were worst affected.

There were signs, even last year, that first time buyers were being priced back into the market, even though most needed a substantial deposit.

In December 2008 they borrowed on average 3.1 times their annual income, against 3.38 times in November 2007.

Meanwhile, mortgage payments ate up 17.1 per cent of their income against 20.7 per cent in November 2007.

More than half of new mortgages were on property under £175,000 which did not attract Stamp Duty.

Assuming up to 100,000 properties were bought for cash in 2008, then the total number of transactions was no more than about 600,000. No wonder estate agency commission income has plummeted.

However, the lettings market continues to grow, as owners rent out if they cannot sell while would-be buyers rent because they cannot find mortgages.

For estate agency businesses, lettings do not produce the sort of lump sum cash flow that sales do, but tend to provide regular cash flow through monthly management fees.

I think when analysing the profitability of estate agencies, we should pay more attention to the contribution from lettings and the nature of the cash flow.

Income from lettings and management might explain why some estate agency chains are still profitable even in a disastrous market for sales.

April predicted to be a crucial month

IT was fun to watch Britain’s top bankers on television facing hostile questions from the Commons Select Committee.

Each had their carefully-prepared apologies, rather like confessions in Stalin’s purge trials. I almost expected them to ‘confess’ to a ‘Bankers’ Plot’ against our Supreme Leader.

Some of the most intelligent questioning came from Conservative MP Michael Fallon.

That aside, the big issue in the housing market is whether the banks and building societies can ease their lending restrictions.

Chesterton/Humberts have enjoyed an upturn in business in January but residential director David Adams says lack of lending is a key problem. It was an issue I identified in my February column.

Mr Adams said: “April will be a crucial month. Will the vast amount of money pumped into the banks find its way into the lending market, which is what the Government hopes?

“Banks seem to operate monthly lending quotas and when these are exhausted they ‘down-value’ properties to avoid lending.”

Mr Adams confirms comments by the Royal Institution of Chartered Surveyors that viewing figures have improved, interest from buyers is returning, and that overseas buyers are particularly keen.

But he believes Stamp Duty and Home Information Packs are holding back deals.

Stamp Duty means buyers need to raise an extra £40,000 on a £1 million property while HIPs inhibit ‘off-market deals’, where an agent finds a buyer for a property which the seller is hesitant about marketing openly.

Yes, there is some spring feeling in the market, but I would guard against getting over-feverish.

BUDGET Day is to be Wednesday, April 22. I am reminded of companies which delay announcing their results while City analysts fear the worst.

There is a plus side for the Chancellor. If he announces any tax ‘nasties’ for the 2010/11 tax year, then the people or companies targeted have less time to plan avoidance.
But many tax changes that could have been put in place for the 2009/10 tax year cannot take place until 2010/11.

This limits any immediate changes in the Budget to taxes which can be altered quickly such as excise duties, fuel duties, VAT and of course Stamp Duty. Any bets on further ‘temporary’ cuts, which is what the estate agency industry hopes for?