Why have Countrywide and Foxtons seen their profits nosedive?

Revenues at Foxtons have slumped in the first quarter as the London-focused estate agent pointed to

Revenues at Foxtons have slumped in the first quarter as the London-focused estate agent pointed to a slowing sales market in the capital. - Credit: PA Wire/PA Images

Brexit, political turbulence and fear of the unknown rattle the cage of the delicate UK property market, but is it all a lot of hot air?

The wheat is growin' thin for London as Britain battens down the hatches for Brexit

The wheat is growin' thin for London as Britain battens down the hatches for Brexit - Credit: Getty Images/iStockphoto

Two of the country’s biggest estate agencies have recorded drastic falls in profits in the first six months of the year. Foxtons has recorded a 64 per cent fall in profits whilst Countrywide recorded a drop of a staggering 98 per cent.

Foxtons recorded a decline in pre-tax profits of £10.5m to £3.8m on the same period last year, with revenues falling 15 per cent to £58.5 million.

Countrywide recorded pre-tax profits of just £447,000, down from £24.3m.

Estate agents have been forced to make large cuts in the face of shaky confidence in property. Foxtons has reduced its costs by £3.7m in comparison with the prior year. Countrywide has reduced management and cut central costs by £ 9 million in the first half of this year. CEO of Countrywide Alison Platt’s report said it is “working actively on plans to mitigate the impact of the removal of tenant fees expected in 2018, including further cost reduction.”

So why might the profits of the nation’s two largest estate agents be declining? We take a look at the major culprits…

London’s crawling

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In the words of The Clash, ‘the ice age is coming, the sun’s zoomin’ in, meltdown expected, the wheat is growin’ thin.’ And that’s not only bad news for wheat-lover Theresa May.

House sales exchanged in the capital are down from 5,702 last year to 4,351 according to Countrywide. The agent estimates that supply has fallen 13 per cent in London in the first half of 2017.

Countrywide’s interim report read: “The London housing market continues to experience low levels of activity owing to political and economic uncertainty, particularly in relation to Brexit, which is felt more acutely in the capital.

“This, combined with the effects of stamp duty changes affecting homes over £1 million and on second homes, means the market for housing transactions in London continued to decline in the six months to June 2017.

“We are also seeing increased differences between vendors and buyers on price expectations while both groups wait to see how the political situation unfolds.”

The personal (decision to move house) is political

With fingers pointing towards the turbulence of the EU referendum last June and its impact on the economy unknown for at least the next few years, Brexit is being hailed as the great destroyer of confidence in housing.

Head of Foxtons, Nic Budden, blamed the decline in profits on sluggish demand thanks to “unprecedented economic and political uncertainty”.

Ms Platt said: “The market for housing transactions has been challenging and our expectation is that it will remain uncertain for some time. As a result the Board believes it is prudent to refrain from paying an interim dividend and will review the situation at the full year.”

This year’s unexpected General Election was also a major player in rattling the cage of the already shaky economy, with those on the right of the political fence pointing to the threat of a Corbyn surge alienating confidence in the markets. Foxtons said: “Further cooling of market in Q2 2017, with the unexpected General Election a factor in slowing activity.”

What goes up…

The house price inflation bubble seems to have been prodded, if not yet popped, with house price growth stagnating. Growth was down 1 per cent in June from 3.3 per cent the previous month, the lowest rate annually since May 2013.

In Camden in July, over a third of homes have been discounted in order to try and get things moving, up from the start of the year. Over 35 per cent of homes in the capital as a whole have faced reductions from their original asking price.

With house prices stalling, some buyers are keen to wait until the potential for growth increases again. As a result, the transaction rate has slowed in the first two quarters of the year. Countrywide reports transactions across the country fell 7 per cent in the first half of 2017, with upwards of 20 per cent falls recorded in the capital. HMRC records a 3.3 per cent decline in June from the previous month.

No fees, please

When the government announced it was to scrap the much-loathed tenants fees charged by agencies on renting property, shares in Foxtons plunged 10 per cent. The argument made by supporters of keeping the fees was that without them, agencies would shift the cost of the fees onto landlords, and as a result, rents would rise.

Easy peasy, lemon squeezy

Household incomes have been squeezed. In April, the Centre for Economic and Business Research recorded that pay growth was at its lowest level since October 2014, and with consumer price inflation outpacing weekly growth in incomes, real wages have declined.

The Bank of England reported last month that average household debt to income in at 135 per cent, with mortgages accounting for over 100 per cent of that total. Consumer credit is now at 10.3 per cent, prompting the Bank of England to warn lenders of the dangers of another crash. In 2006, mortgages made up 104 per cent of household incomes. The Bank in particular warned of the risks of extending mortgage lengths over 25 years, and giving high loan to value lending.

Fake news?

Commentators have argued that this year’s figures appear distorted since last year’s introduction of the 3 per cent levy on second homes led to buyers rushing the market in the months leading up to April, skewing the figures.

Alison Platt, CEO of Countrywide said: “As anticipated, the first half of 2017 was tough for the Group compared to the same period last year given the high levels of housing transactions brought forward in time as a result of the stamp duty changes and the EU referendum.”

Foxtons blamed poor sales revenues of -29 per cent on “Q1’s surge in the prior year and impacted by further political uncertainty.”

The stamp duty changes have had their impact on the beleaguered buy to let market, which has stalled in the wake of additional charges on second homes. The charges have had an adverse impact on the £1 million plus market in particular, where affluent buyers are not so comfortable as to render extortionate stamp duty charges irrelevant.

Crash, bang, wallop

Research by online property agent eMoov.co.uk has shown that it could take the UK property market seven and a half years to recover back to its current level should a crash occur with the same impetus of 2007.

Using Land Registry data, eMoov calculated that between the end of 2007 and the start of 2009, the average house price dropped 19 per cent from £190,032 to £154,452. A similar crash could result in property values falling to £178,886, equivalent to a loss of £41,208 based on the national average of £220,094.

In Camden, the average house price is £814,188, which would result in a new average of £661,772 based on a drop of 18.72 per cent over 18 months. The new London average would fall £85,000 to £395,753, taking 4 years and 7 months to recover the 22 per cent it would need to meet the current £480,000 average.

Today, it would take longer than in 2007 for national house prices to recover, taking 7 years and 7 months, based on monthly price growth trends. As a result, it would be 2025 before the curve returned to its height today.

Mr Quirk said: “You are far better off selling your home now with a very slight depreciation of below 1 per cent, than in the midst of a market crash with a potential deduction of around 19 per cent on your property price, albeit a speculative crash at present.”

Always look on the bright side

Foxtons said that they maintained their position at the head of the industry, and that 95 per cent of asking prices were achieved in sales in what it labelled a “challenging market”.

Ms Platt added: “Based on our current performance and the outlook for housing transactions in the UK, we expect our results and our leverage for the full year to be within the range of market expectations.”

Russell Quirk, CEO of eMoov.co.uk was quick to note that the online agency is not predicting a crash.

He said: “We are by no means predicting the UK property bubble is about to pop and in fact, other than a potential prolonged flat rate of growth, we believe the market will remain in good stead for the remainder of the year.”