What Britain’s best-loved estate agent can tell us about UK house prices

Today we are talking estate agents.

We do so, because their fortunes can say a great deal about which way the housing market is going.

Specifically, we are focus on the “green Mini” brigade.

Yup, it’s everyone’s favourite estate agent – Foxtons.

Behold the wondrous pinnacle of the estate agents’ art – Foxtons

It’s hard to understate the surge of exhilaration we experience when we are cold-called about a house we briefly had on the market 11 years ago – and then the warmth we feel when we discover the caller is from Foxtons.

Equally hard to articulate is the sense of benevolence we encounter as we are splashed at a pedestrian crossing by a green Mini driving through a puddle at speed to make the lights.

If there is one company that acts as a kind of distillation of the communal love we hold as a nation towards the profession that is the estate agent, it is Foxtons.

Foxtons Group went public in 2013, and caught the back end of the quantitative-easing infused boom in London property, rising to a high of 380p by spring 2014.

For me, spring 2014 is when the madness in the London property boom reached peak insanity. Buyers were everywhere, open days were mobbed, gazumping was rife, money was pouring in from abroad, lending was easy, agents wouldn’t give you the time of day unless you were an unencumbered cash buyer, and houses which were first shown on the Saturday had sold by the following Monday.

And as you can see below, Foxtons’ peak coincided with London’s.

Foxtons share price chart

Many have blamed the decline in London property values on ex-chancellor George Osborne raising stamp duty. Sure, the higher duties have killed transactions – the cost of moving is now so high, many chose to stay put – but London was already in decline by the time Osborne announced his changes in late 2014, in his final budget before the 2015 election. Tighter lending laws, introduced in April 2014 – and necessarily so – were what put the brakes on.

Over the following three quarters, Foxtons lost nearly half of its market value.  First, there was the slowdown in lending – and thus transactions. In August 2014 there was a profit warning, with another the following October. Things improved in the first half of 2015, but then the bear took hold again.

Brexit was a big blow, knocking another 30% off or so. And I’m sure that if both sides of the referendum debate had been more upfront about the consequences of voting to leave the European Union on Foxtons’ share price, “Leave” would have won by a considerably larger majority.

But in the 18 months since the referendum, support seemed to have been found at just above the 90p mark. Rather like London property, the price was stagnant and atrophying, rather than in outright decline.

Until this summer that is, when the 90p barrier gave way and the price sunk pretty pronto to 80p, where it sits as I write.

Foxtons is at an all-time low – but it could well have further to fall

Irony of ironies, the genius market timer who is Jon Hunt, founder of Foxtons (he famously sold the business for £375m in 2007, just before the financial crisis), is currently – via his company Ocubis – selling a £50m plot in Vauxhall.

The agent he’s appointed to handle the transaction is Strutt and Parker. Actions speak louder than words.

Foxtons got its initial public offering (IPO) away in 2013 at 230p, at the top of the targeted 190-230p range. By the end of its first day’s trading, it was some 20% higher at 270p. Within a few months it saw its high of 380p.

The current situation is that anyone who has ever bought Foxtons is now underwater.

Foxtons’ market cap now stands at around £220m – a full £155m below Hunt’s selling price (and there has been quite a bit of expansion since).

Using rounded numbers, in 2016 revenue was £133m, pre-tax profits came in at £19m, earnings per share (EPS) 5.7p, the price/earnings (p/e) ratio 18 and the yield 2%.

The forecast for 2017, according to Digital Look, is for revenue to drop to £120m, pre-tax profits to be £10m, EPS to be 3p, the p/e to be 29 and yield 1.8%.

Assuming those forecasts more or less come good, you have to say, even at 80p, Foxtons is not especially cheap.

However, in July, Foxtons reported that first-half, pre-tax profits had fallen by 64% to £3.8m from £10.5m in the first half of 2016, while revenue also fell – by 15% to £58.5m.

Group adjusted earnings before interest, tax, depreciation and amortisation fell by about 45% and EPS came in at 1.2p from 3.0p the year before. This is worse than forecast.

The reason given was “unprecedented” economic and political uncertainty. Foxtons added that it expects trading conditions for the second half of the year to be “challenging”, which is estate agent speak for “horrible”.

If the trend of the first half continues into the second – not such an unreasonable projection – earnings will thus come in around £7.6m – some 25% lower than forecast.

In short, there is room for a further slide in Foxtons’ share price, particularly if the property market continues to stagnate.

Let’s be clear – this is not just Foxtons

I should stress, however, that Foxtons does actually make money. In its favour, also, is that it has no debt.

Its rival Countrywide, which counts John D Wood as part of its roster, is in a more parlous state, I’d say, with the additional noose of debt around its neck.

The price action is similar. The outlook bleaker.

It is easy to lay the blame for the plight of these estate agents at the door of new, cheaper online rivals such as Purple Bricks, and there is some truth to that.

But, after a stellar first half, Purple Bricks itself has also been in decline since the summer, when it hit 500p. It’s now 20% lower at around 400p.

I get the whole growth argument – Purple Bricks is a new way of selling your home, “blablablah”, as my French friend is always saying to me – but with a market cap of over £1bn, revenue considerably lower than Foxtons’ or Countrywide’s and loss-making, for me this is the most compelling short of them all.

(To be honest, I don’t see why Rightmove and Zoopla don’t just cut out the middleman and became estate agents themselves. The platform is already there, as is the market share).

So all in all, the plight of the estate agents is fairly grim, and lower prices beckon across the board. This is a consequence of low transaction volumes. The current chancellor could sort that in his Budget later this year by lightening the stamp duty load – but I’m not sure if it is his inclination to do that.

So what does it mean for house prices? Well, the estate agents may be sending out the message that house prices are headed lower, but the builders – and indeed both Rightmove and Zoopla – have largely enjoyed a flatter share price action. This might be explained by there being some anticipation of further building ahead. But to make a full-on bearish call on UK housing, you’d probably want to see their share prices in freefall as well.

Maybe we’ll see that too. But meanwhile, I wouldn’t touch the estate agents with a bargepole, unless it was the short end of the stick, if you catch my drift.

  • alexblackka

    NICE article Dominic!

    • Peter Edwards

      Stagnant house prices good, Falling house prices usually take the economy with it. Don’t get it though with the pound cratering you would think that foreigners would pile in.

      • JamesTennant

        That’s the point. House price inflation and the subsequent injection of new money into the economy is used as a means to increase consumption and thereby for the UK to retain a semblance of economic growth. As an economic strategy it’s a disaster, entirely unsustainable in the long run with a huge price tag for the young. As for individual liberty, forget about it. housingracket.blogspot.co.uk

        • Tawse

          Yep, we moved from an economy where people could just about afford a home but were unable to afford the new carpets, white goods, etc.

          Then we moved to an economy where house prices just became more ludicrous than anyone thought.

          Brits are maxed out and the open borders means that the UK is flooded with more people than we can house – and many of the people coming in are a housing, education, social benefits and NHS burden. Absolutely crazy.

  • Tawse

    I want to watch the debt-bomb video again after reading this.

    With the slower autumn coming for the housing market these shares could all have much further to fall – but by December they could see an uptick as people look forward to the start of the next housing market buying cycle. People always get excited around Christmas time that Spring will bring loads of house sales.

    Assuming, of course, that Uncle Carney has not raised IRs by then – he loves a good housing bubble does he not? I would love to see an IR rise and the affects on these housing stocks.

    Good article.

    • Tawse

      Should have added that I am not really sure what Purple is – estate agent or loan company. Does it matter? Looks very expensive on the charts.

      It will be interesting what the trading statements are of Countrywide and Foxtons are this Autumn.

  • DemiSapien

    If you price estate agents in USD their plight is even worse and it would seem from the models they have further to go down. House prices may have flatten off in GBP but they have been obliterated in USD (even since this years uptick in GBP/USD). Companies like Foxtons are bought or sold based on international capital flows and confidence or lack of it and a many multitude of factors affect this.

    I am not sure why international capital flows are so often overlooked at MW. Many factors contribute to price moves and all are more than simplistic one dimensional cause and effect. That would be like just measuring the GBP of Rhyl and applying a forecast for the whole country. It would be myopic beyond belief. But even that maybe correct once in a while just as a broken clock is correct twice a day!

    This is not to criticise Dominic, as he is much better researched than most. But surely we need a bit more than one dimensional analysis on which to base critical investments?

  • nikkop

    Is there realy such a thing as a ‘best-loved’ estate agent? Really? You’ll be calling them a ‘national treasure’ next. Come on.

  • Sneakus

    Everyone’s favourite estate agent?

    What you smoking, Dominic?

    • Tawse

      I think there was a big dollop of sarcasm in his use of those words.

    • UnderstandingIndustry

      google, search, sarcasm

  • Beth Williams

    Foxtons is one of those companies that contribute nothing to this world. So when they vanish they will not be missed.

  • Momoko Miyamoto

    Moneyweek calling the top of the London housing market AGAIN!? Having got it totally WRONG for the last 10 years, GIVE IT A REST. The reason why Rightmove doesn’t cut out the middleman is cos they are OWNED by the middleman. House buyers and sellers are starting to wise up to cheaper online agents ala Purple Bricks who could really clean up and do to high street agents what Amazon/Ebay did to retailers. Boy I wish I’d shorted “overvalued” Amazon/Ebay all those years ago cos I would now be sitting on a fortune – NOT.
    The thing that will really determine the direction of London prices is BREXIT. From recent political noises, it increasing seems possible that Brexit will turn out to be Brexin (with some tweaks), if we stay in the single market/customs union then prices will take off again like a rocket.

    • beckjeremy .

      “The thing that will really determine the direction of London prices is … ”

      • UnderstandingIndustry

        more accurately, the thing that will really determine the direction of London house prices, is the level of supply of credit

    • LeMonsieur

      Sorry which part of the article calls the top in the London housing market?
      I can’t seem to find it.

    • London prices have nearly halved (currency impact plus real price falls) in dollar terms (the world’s primary reserve currency) since MoneyWeek have been making that prediction. I’d say they weren’t far wrong in real terms on that basis. Real terms are what matter for your long run financial success not nominal simplistic headline numbers.

      • Triple H

        Dollar terms? Last I checked the currency most people here are interested in and use is the sterling. If you’re talking about large investors, probably foreign, then yes, the prices have come down. But for most people who earn and spend here in the UK, prices have only gone up, in real terms i.e after inflation. So you’re not exactly right to fight MW’s case here.

        • Triple H – pretty much every real world thing you or the companies you buy from want or need to buy is priced in dollars (oil, agricultural commodities, energy inputs etc…) so it is incredibly relevant if you want to think about your real wealth and actual purchasing power. To think only in sterling will have a detrimental affect on your ability to grow wealth over time – which is what MW is trying to help you (and all of its readers) with.

    • UnderstandingIndustry

      brexit lol.

  • Jonathan Tedd

    Good read as ever. I am moving and am being offered mortgage rates under 2%. EAs are under pressure because of the expense of moving, consequently there’s little out there. There’s no turnover for them. Throw in these online jonnies you’ve got a perfect storm – for their demise but no house price crash – not with such low rates.

  • Triple H

    This is another reason why I support low interest rates. Why the hell do MW keep hoping for a property crash which will be caused by high interest rates? It seems as if the only thing that matters here is to pick up ‘investments on the cheap’ no matter what the social consequences are. People losing homes is not a concern MW would care about it seems.

    • nikkop

      But endless credit on the cheap is okay? Bring the crash on and shake the damn market out. Too many people think they ‘own’ something. Let’s see what they own when the price of credit is normalized. No homes will disappear. It’s just that the people making the homes will be different people. Natrual churn. Quit bellyaching.

  • Horiboyable .

    In the next recession house prices will tumble 50-60% and will remain there for over a decade.
    Japan real estate pecked in 1992 and is still 50% down today from their 1992 highs.

    • Triple H

      Japan UK. Japan’s population is declining and there are fewer reasons for there to be any kind of pressure on housing over there. The UK is the opposite specially given that we (at least pre Brexit when sense prevailed) welcome the high achievers of the world over here. If we have a shambolic Brexit (likely because of Maybot and her fascist cronies hanging on to govt), yes we will have a mega crash but not just in property.

      • UnderstandingIndustry

        Japan’s population is declining precisely because of their credit and house price boom which happened earlier. It’s going to happen in the UK too, especially post Brexit/exile of nationals.

  • Beth Williams

    It is actually getting much worse at Foxtons. In a stagnant property market the management have made a crucial error by rapidly increasing the number of offices across London with consequent staffing and rental costs.
    With more people choosing to use online agents it is doubtful if Foxtons shares have any value and it is doubtful if the company has a future.

    • UnderstandingIndustry

      yup they doomed alright