Estate agents, housebuilders and the outlook for UK house prices

Foxtons Estate agents © Getty Images
The worst may be over for Foxtons. But not for others.

Today we consider the UK housing market.

The outlook has not been clear for some time. On the one hand, in many parts of the country, house prices are “too expensive” by just about any traditional measure, and need to fall.

On the other, sellers have mostly refused to lower their prices. And government intervention, whether via low interest rates or high stamp duty, has only added to the atrophy.

The result, for two or three years now, has been stagnation. Neither the bulls nor the bears have won the argument.

Will that change in 2018?

Sing me a sad song for the estate agents

In 1999, before the great era of central bank interest-rate intervention began, the ratio of house prices to earnings stood at 3.7. Today, according to the Office for National Statistics, the house-price-to-earnings ratio stands at 7.6.

This varies considerably by region. Copeland, West Cumbria, is the most affordable part of the country (in terms of local earnings) at 2.8 times the average pay packet. Kensington and Chelsea is where the ratio is at its highest – at 38.5 times.

Of course, this is just one measure of affordability. Earnings do not matter so much if you already own a property. What is more important are financing costs; low interest rates have made mortgage repayments very cheap for a very long time.

And as an indicator of whether to buy or sell, the house-price-to-earnings ratio has not worked for many years. As regular readers know, I like look to other bellwethers – the state of the companies that operate in the sector: the estate agents, the portals and the builders.

We’ll start with the estate agents. (NB: all of these charts are three-year charts. The red and blue lines are the one-year and 55-day moving averages, which will give you an idea of the trend.)

Here’s Countrywide (LSE: CWD), the UK’s largest estate agent.

This is not good. At all. What was a 600p stock three years ago is now an 80p stock. New lows were hit just this week. The decline is inexorable.

London-centric Foxtons (LSE: FOXT) is not much better.

From 290p in 2015 to lows around 65p. What is more positive about Foxtons is that there appears to be some sort of stabilisation around the 65p level. The 55-day moving average is now sloping upwards, ever so slightly, indicating a change in trend. The worst for Foxtons could be over.

One obvious reason for the weakness in these two agents might be that they have lost market share to cheaper, online versions – such as Purplebricks (LSE: PURP). The story here is almost the complete opposite. In terms of share price performance, it has done everything the traditional agents haven’t. From below 100p to over 500p.

However, even although both the one-year and 55-day moving averages are sloping up, indicating a rising trend, I would be nervous owning this stock. You could make the argument that it is fully valued: its market cap is over a billion, last year it was loss-making, this year its forecast P/E is 600.

But my main concern is that chart. It has double-top written all over it and my instinct says it has run out of steam at 500p. It is one that could easily come back to earth with a bump.

Property portal Rightmove (LSE: RMV) hit new highs at the beginning of the year, though those gains have since been given back. Looks like a range-trader to me.

Zoopla (LSE: ZPG), on the other hand, is now trending lower, having had an excellent 2015 and ‘16.

Are the good times over for the housebuilders?

So to the builders. These have been one of the success stories of the post-financial crisis era. And I’m going to use five-year charts for these.

Let’s start with the biggest, Barratt (LSE: BDEV).

I’ve got to say, based on hocus pocus charts alone, I would be very worried owning this stock. It, too, has got double top written all over it.

In October last year it looked like it was breaking out to new highs, but that’s proved to be a false break, and since then it has gone from 700p to 550p at some speed. I can’t help thinking 350p beckons.

Taylor Wimpey (LSE: TW) is telling the same story.

Persimmon (LSE: PSN) has been probably the stand-out performer, bucking the double top of the others.

It hit that same wall last October, and now it’s turned down.

Finally, here’s Berkeley Group (LSE:BKG), which peaked around the beginning of the year.

It has done extremely well.

Overall, it’s not looking good for property – but a crash is unlikely

I turned bearish on London new-builds in 2015, because of the over-supply of not-particularly-nice two-bed flats coming to market  (I was the first onto that particular story).

But it was impossible to be bearish on UK property as a whole, because, even if the estate agents were weak, the builders were strong. (There were also company-specific reasons for the agents’ weakness).

But looking now at the agents, the portals and the builders; looking at current property valuations; at the outlook for interest rates; at the stagnancy in the market, and the sheer cost of buying a place to live – it all makes me bearish.

Yet property remains a religion in the UK. For those that own, a house remains their most valuable asset. No government wants a property crash on their watch.

The market has become quite area-specific. London new-build remains a disaster zone. But in general my call is this: more stagnation and atrophy with a slightly downward bias, but a crash such as we saw in 1989, despite current overvaluations and demographics, remains unlikely.

Happy Valentine’s Day to all. Go and give your loved one a big fat kiss!

  • How could you not include HTB when talking about government intervention? #endh2b #bringbackcapitalism housing sorted. Anyway, long term rates could well be ending their 40 year fall.

  • Simon

    The plight of the traditional estate agent is hardly surprising. The traditional agent is labour intensive, has low barriers to entry, requires premises but also is one of the few service businesses that requires absolutely no professional qualifications. Any idiot can be an estate agent and a lot are. If you add that they use an outmoded display method in an area where almost every potential housebuyer is online and used to online searches, the long term decline of traditional bricks and mortar agencies is the obvious conclusion. That doesn’t make online agencies a good investment either, they use the internet as disruptive technology and low fees to win market share, such companies oftenm struggle to break away from gaining market share through loss making pricing to becoming profitable. Think Last Minute.com once thought of as a tech stock but in reality an online bucket shop and now simply a discount travel agent.

  • John Doez

    Dominic has made some great calls of late. The only issue I have is with the idea that house prices can stagnate for a prolonged period of time. They seem to go up or down at rates of around 10 percent a year in both bull and bear markets.
    But we live in very odd times. The UK hasn’t been this undercapacity in terms of housing stock in living memory, if ever, and there are significant bottlenecks in the planning system when it comes to new builds.
    The solution is a return to prefabs (the standard of which is very high now), opening up land for new estates, and rebalancing the economy away from London/South East to where prices are more reasonable. But I question whether this government has the energy to do this given so much of its attention is on Brexit.

    I think the more likely result will be a Corbyn government, elected on the back of the housing crisis, which will automatically crash house prices by introducing even higher taxes on property, especially BTL, and nationalising large areas of land for house building.

  • Stephen

    Amazing to see Moneyweek NOT predicting a property crash – even while remaining bearish! What is it now – ten years of wrong calls in this area? But did you check in with Merryn on this Dominic?