The Impact of the NCA on Real Estate Agents

The estate agent community has expressed extensive concern over the NCA. Is the picture really that of gloom and doom? Just as with other articles this month, the answer is yes or no, depending on your perspective. To help you decide which, this article takes a broader view of the picture so that we all can hopefully make more sense of the situation.

We recently published an article focused on the negative effects the NCA is having on the economy as a whole. However, when we look at the estate agency industry we must realize that it has many sub-sectors. For the purpose of this article, we will only discuss residential, as we believe that this sector is currently the greatest pressure.

So, is the doom and gloom projection and speculation for estate agents in the residential market due to the NCA and how much does the NCA impact on such a possible outcome?

The current truth expresses by many estate agents is a resounding – yes. But we think that there is more to the story than meets the eye.

By now all property investors should be aware that fewer bonds are being granted, more people rejected for financing of all types and the Bond approval period has been greatly extended. Estate agents started with a small change of 20 days to bond grant, extended new offers to purchase to 45 days and in the last report heard the recommendation is to write 60 days for bond approval. Wow!!! This can’t possibly be good for an estate agency that now has to wait for Commission income in 6 months. This situation could possible devastate small agencies that need the income to carry on business. One can easily understand the reason for excessive concern.

The point is that the NCA most certainly has the very real potential to cut an estate agents earning in half. However, the NCA alone cannot be blamed for all the problems. Instead there is a culmination of events and practices that have lead to the current situation.

Agents are being too hasty when they blame everything on the NCA. They are partly responsible for the current compounded situation because for too long they simply shirked the factor of buying power from their businesses. Sell, sell, sell and at the highest price was the motto.

If we look at the immense growth in property prices in the last few years and take into consideration that average house price is around 900,000 we see other factors come into play. This fact alone without the NCA, puts a lot of people out of the market to buy using the old 30{919468b76a1b111b1791bdf3e51426d8562c963af300c016649515c15309dd6c} income ratio used to gauge bonds. If property prices continue to escalate, we can safely assume that, with NCA or without, the affordability would have naturally excluded many buyers out of the market. The NCA just added some very big logs to an already raging fire. The problem just got bigger.

To keep with perspective we have to add the large buy-to-let investor market. In the last years agents have eagerly been selling properties for investment with large shortfalls on the monthly cash flow. The hype was huge and demand just didn’t stop. Investors with such high gearing, 100{919468b76a1b111b1791bdf3e51426d8562c963af300c016649515c15309dd6c} and more bonds, have become over exposed in their financial affordability. However, keep in mind that they are not over exposed merely due to the NCA. To keep things in perspective they would have, sooner or later, with or without the NCA, been deemed as over exposed by the banks which would then have stopped lending to them, so the problem again was imminent if analyzed closely. The NCA just helped make it happen sooner rather than later.

So, where does it leave estate agents in the residential market? It leaves them with a big problem. However, all problems do have solutions, though not all solutions are easily accepted, nevertheless there are solutions.

Lets look at some solutions that estate agents may want to explore and even act upon.

  1. Estate agents have been famous for over valuing homes in the last couple of years. With buyers lined up, at that time this was OK. Maybe now with lower affordability they will sell homes at a more fair value. This will give more affordability for buyers too and maybe more bonds will be approved.
  2. Agents may start to consider working with a type of investor. Investors that are looking for income producing properties. However, to work with such investors after being accustomed to selling “Equity growth” with negative cash flow, will require significant change in mind set. Change in mind set must also go with some understanding and education about the systems that such investors use. This could prove extremely profitable for agents, in the short to medium term, especially if things turn real nasty in the residential property market. This is simply because such investors only start to invest when things go bad, they don’t buy in up market periods. When talking to agents, one notices that most don’t tap into this market at all. There is no real reason for agents to starve in down times, all they need to do is change their strategy and find a new type of buyer.
  3. Another consideration that most agents do not want to hear or consider is to drop commission significantly. When one looks at the figures, this just makes sense in a down market. Let’s say an agent sells 10 properties at 10,000 commission, while another sells one property for 50,000 commission. In this case you can clearly see that 10 properties will bring 100,000 commission, while the other only half. This is simple maths and doesn’t take into consideration that the agent with less commission will also get easier mandates, make the property more affordable for the buyer and maybe even get more bonds approved. It may not be a lot more, but in a tight market a little more can make a whole lot more difference to paying the bills.
  4. Agents can cross over to other sub-sectors in the property brokerage industry. They can retrain themselves to move into commercial, land and industrial. These sectors have different periods of ups and downs and they can move from one sector to another to compliment income when residential sales are slowing down. For the long term this could prove to be a valuable strategic diversification technique that can provide more income sustainability.

To summarize, at the moment the residential market is going through a slow down period. People will always buy houses, but not always at the same rate. The NCA has put FAR more pressure on the residential market than there was before and the full impact can only be seen down the line. That may be too late for some estate agents, as they also need to feed families and pay bills at the end of every month.

That said, flexible and agile agents, willing to learn and change their strategies, put effort into their business and wear down the situation. Many may even thrive and make more income than before, if they can only accept that the “cheese has moved” and move with it.

Therefore after all is said and done, the doom or boom projections of current circumstances will depend on the specific circumstances of the agent and their maneuvers in the market place.

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