Housing hindsight – word on the street much more positive than that from the lenders

This week we have had newsflow from estate agents (good news), Halifax House Price Index (very good news) property portals (Excellent news), the Bank of England (better than expected news), The Motor Industry (glass half full but worried about leaks) and lenders (batten down the hatches)

Overall, the news was more positive than we expected, home buyers and sellers appear to be less worried about the macroeconomy and COVID than the Bank of England and the mortgage lenders. Whilst car manufacturers caution that the bump in sales in July could be a blip in the road, estate agents and property portals believe there is nothing ‘mini’ about the boom.

Estate agents

Purplebricks

The challenger hybrid agent

What they said

• UK Instructions down 23% to 53,680
• Website unique visitors down 3% to 13.1m
• Average Revenue per Instruction up 12% to £1,394
• UK revenue flat for the first 10 months of FY2020 but down 11% for the year as a whole
• July 2020 saw the highest ever month for instructions at over 7,000
• New pricing models to expand the addressable market
• Market rebounding strongly following lift of housing market suspension and Stamp Duty holiday but outlook remains uncertain

Twindig Take

The most interesting take away from the results in our view was that Purplebricks will be moving away from its current ‘pay whether or not you sell’ model to having part of the fee linked to actually selling rather than just marketing your home for sale. This reversion towards a more traditional fee structure suggests that old dogs can teach new dogs new tricks.

Purplebricks referred to this as a move towards a more sophisticated pricing model, but in reality, the pay whether or not you sell model has limited appeal and the Company realises that to further expand its market share it has to offer a broader range of pricing options. This move may be good for home sellers but it risks reducing the fee pool overall for estate agents and may therefore lead to a less competitive market. Perhaps a case of being careful what you wish for.

We were pleasantly surprised to see Purplebricks posting its highest ever level of instructions in July 2020 following the announcement of the Stamp Duty Holiday. It is impressive and not what we would have expected to see.

However, the question remains how many of those instructions go on to sell? Once again Purplebricks results did not disclose how many homes they sold. They did point to some third party research which said that their conversion rate was 35% higher than traditional high street agents (although it didn’t specify if this was referring to ‘Sold Subject to Contract’; or actual completed sales). Twindig estimates that the average converts 50% instructions to completed sales, a 35% uplift would be 67.5% implying that around a third of instructions don’t sell. This means about one in three of purplebricks customers pay their fee but do not sell their home.

LSL

One of the UK’s largest national estate agency businesses

What they said

• Revenue down 25%
• 85% of furloughed staff (2,800 out of 3,300) now back at work, with more returning in August
• No material change in house prices detected as a result of COVID
• Estate agency instructions in July 2020 c.20% ahead of July 2019, (particularly strong in London)
• Financial services: mortgage applications in July 2020 more than 20% ahead of the prior year
• Surveying instruction volumes broadly in line with July 2019
• It is not possible to make an accurate assessment of trading prospects and the Board is therefore unable to provide financial guidance for the year ending 31 December 2020

Twindig Take

As the housing market has re-opened, LSL has been quick off the blocks and their instruction levels in July build on the picture pained by Purplebricks earlier in the week. It is still too early to ascertain if this is the outworking of pent up demand rather than a return to normal, but the fact that activity is growing is good news (the news could be worse…). Perhaps a better guide will be a return to formal guidance and a return of all employees from furlough. During the results call LSL’s CEO did not want to speculate over how many of those still on furlough will return, which suggests to us that not all of them will be.

LSL’s commentary on house prices (no falls detected) will be warmly received by homeowners and hold out the possibility that the housing market COVID casualties will be restricted to transaction volumes. However, we note that Metrobank, the challenger bank, has a base case scenario where house price falls by 14.6% in 2020.

LSL’s commentary on London differed significantly from that of Foxtons, perhaps a reflection that LSL’s Marsh & Parsons transactions are typically at a higher price point (on average around £800,000) than Foxtons (c. £560,000) and the wealthier are generally less (financially at least) impacted by COVID.

Savills

The higher-end estate agent hitting the sweet ‘rich’ spot of UK residential

What they said

• UK residential revenues down 8% in H1 2020
• Strong surge in activity since the UK housing market re-opened

Twindig Take

Savills UK residential revenues were only down 8% in the first half of 2020 with second-hand agency revenues down 16%. The Group has seen a strong surge in activity since the UK housing market opened with a record number of transactions going under offer in June. Recovery is primarily in the Country markets but there has also seen a significant recovery in their core London markets.

Savills UK results are robust but perhaps hint at the wealth impact of COVID-19 on the UK Housing market, whilst the average house price in the UK is around £240,000 the average price of the homes Savills sells is £1.2m in the regions is and £1.9m in London.

Halifax House Price Index

What they said

• House prices rose by 1.6% in July, up 3.8% year to date

Twindig Take

The Halifax House price index reports house prices rose by 1.6% in July. It appears that home buyers are not as concerned about the economic outlook as the mortgage lenders themselves. It will be interesting to see if the positivity of UK homeowners causes the lenders to change their tune. With a shortage of stock and UK households keen to get moving after months of lockdown, house prices may be firmer than the lenders currently believe. Good news for estate agents and housebuilders and all those with businesses linked to home moves.

Rightmove

The UK’s largest property portal

What they said

• Revenue down 34% to £94.8m
• Profit Before Tax 65% (from 75%)
• Memberships down 3.3% - 3.5% decline in agency and 2.1% fall in new homes
• Since 13 May recorded 65 record beating days beating previous record 19 Feb 20

Twindig Take

Estate agents and housebuilders may not like the price of Rightmove’s services, but we certainly admire the quality and robustness of its earnings. Not many companies could see revenue fall by 34% and profit before tax margin only reduce by 13% to what is still a staggering 65%.

Lockdown has increased our fascination with property since the UK housing market reopened Rightmove has broken its previous website traffic record a staggering 65 times. This reflects what housebuilders and estate agents across the country are telling me that they have never been busier.

This is very good news for the UK housing market straight from the coal face.

Metro Bank

Challenger UK bank

What they said

• House Price forecasts for 2020: Base case down 14.6%, downside down 19.5% upside down 12.1%
• We extended existing mortgage offers for customers buying a new home for up to three months to give them extra time to complete transactions
• 17% of residential mortgage holders took up UK Government-supported payment holidays
• The number of non-performing mortgages has increased by 62.5% to 0.39% of the mortgage book

Twindig Take

Metro Bank is another UK mortgage lender whose view of the UK housing market is much more cautious than the UK estate agents. Whilst estate agents are reporting high levels of activity and growing sales pipelines lenders appear to be preparing for much much colder market conditions.

If the so-called ‘mini-boom’ in the UK housing market becomes a sustainable boom then lenders may have to add water to their glasses to make them half full.

Although small in number non-performing mortgages has increased by 62.5% to 0.39% mortgage book to £39m. This may, of course, rise further if the UK unemployment rate continues to increase.

The motor Industry

The Society of Motor Manufacturers and Traders (SMMT)

What they said

• Pent up demand sees UK new car registrations up 11.3% in July to 174,887 vehicles, as dealerships across the country fully re-open
• Overall registrations down 42% Year to date
• Expect sales to be down 30% (or £20bn) by the end of 2020

Twindig Take

Interesting that new UK car registrations saw a similar 'bounce' to estate agency instructions in July, although the motor industry appears more cautious on outlook than the industry chiefs in the housing sector. Andy Barratt, managing director of Ford of Britain, which employs about 9,000 people in the UK, said he was "pleased to see any rise in consumer demand, but I don't think this is a long term indication of a V-shaped recovery".

It seems that car lease renewal cycles may be diving demand following a long period of forecourt closures.

Whilst 'lease renewal cycles' arguably apply to tenants in rented accommodation, they don't apply homeowners so without this regular cycle to encourage sales it will be interesting to see the extent to which car sales and house sales track each other in the coming months.

Bank of England

What they said

• The impact on the economy, while deep, has so far been less sharp than was incorporated in the scenario set out in the May Monetary Policy Report (MPR).
• The recovery in the UK has been somewhat more rapid than was expected at the time of the May interim Report, mainly reflecting that lockdown measures were eased earlier than had been assumed

Twindig Take

Due to a rapid response from the UK Government, the economic impact has, so far, not been as severe as the Bank of England expected in May 2020. This is good news.

However, we were surprised that the Bank of England’s central case assumes no second spike with COVID cases rising both in the UK and in Europe this may be slightly optimistic and we would have preferred to have seen a ‘probability-weighted’ base case which at least factored in a small likelihood of further lockdown measures.

Digging into the detail we also noted that whilst the wealthy have weathered COVID well: expenditure down and savings up, those on lower incomes have fared less well. Lower and medium-income groups have less discretionary spending and have therefore not cut spending as much as the wealthy. There may be a negative knock-on effect for the UK economy if those who get to the end of their mortgage holiday (about 1 in 6 mortgage holders) have to start cutting their spending elsewhere to pay their mortgage or trouble ahead if they are unable to meet their mortgage payments.