Estate agents organise the sale or lease of properties for commercial or residential purposes. As property is a large expenditure with long term commitments from buyers, a customer’s ability to buy property will be largely dependent on macroeconomic factors such as; interest rates, inflation, unemployment, income and the business cycle.
Possibly the most significant factor in determining the success of UK estate agents is the rate of interest charged on mortgages. As houses are a large expenditure few people can afford to buy one outright, so most people rely on a mortgage to enable them to buy. Mortgage rates are the percentage of the loan that a consumer has to pay to the lender in return for the loan. Mortgage rates in the UK are influenced by base rates set by The Bank Of England. Currently interest rates are relatively low. This should have a beneficial impact on the success of estate agents as more people can afford to buy houses. Having more potential buyers encourages potential vendors to put their houses on the market so selling becomes easier. As estate agents work on commission, the number of sales is a key factor in their success. If interest rates rise, fewer people will be able to afford to take out a mortgage so fewer houses will be sold. This will have an adverse effect on the success of UK estate agents as they will have depleted revenue streams.
Inflation is another significant factor which determines the success of UK estate agents. Inflation usually occurs when a country prints more money than is justified by the country’s wealth. Inflation causes prices to rise each year, the UK has an inflation target of 2%, which is set by the Bank Of England. This is set to ensure the economy is stabilised. Currently the UK inflation rate is 2.7% but RPI inflation which includes housing prices is 3.1% this is higher than ideal and may result in fewer people buying houses as prices are too high. This is because inflation is not usually in line with pay increases, so people can afford to buy less and less as time goes on. For estate agents this is unfavourable as will sell fewer houses, receive less commission and therefore make less profit, or possibly losses. Another thing worth considering is that any profit that estate agents do make is devalued by deflation as prices are rising.
The effects of income on the housing market are linked to inflation. In the UK incomes have increased by 1.4% over the last quarter, which sounds good but in reality it is still lower than inflation. This means that people in the UK are earning more money than before the international financial crisis but the money they are earning is worth less. The result of this is that people have a smaller disposable income so they cannot afford to expend large amounts on houses and other luxury items.
The unemployment rate in the UK is currently 7.7%. Which is a 0.1% decrease from the previous quarter but is still much too high. High unemployment means that fewer people are earning and therefore fewer people are able to afford to buy a house. This causes a fall in demand. Falling demand means that fewer people are competing to buy houses so the house prices will fall. This means that estate agents will be selling fewer houses, at lower prices so their commission will be greatly reduced. This can lead to cash flow issues in times of unemployment and if rates stay high over a long period of time, (eg in the current recession) it could mean that firms have to take out large loans to remain open.
The business cycle has a huge impact on the success of estate agents in the UK as in times of recovery and boom, construction firms are building more houses and flats as they gain confidence and the demand is higher, this also increases employment and therefore incomes. In recession or slump stages there is less construction, there are fewer new houses and even fewer people can afford them. This causes the housing market to slow right down and sales will drop dramatically.
The travel industry and the automotive industry are also greatly affected by macroeconomic factors as they are expensive to buy. Factors like unemployment and inflation make it difficult for people to afford to travel or buy a new car. Many people purchase cars on credit which means that interest rates will also have to be considered by potential buyers. If interest rates are too high people are likely to buy second hand or keep their current car for as long as possible.
However newer, more expensive cars are price elastic as consumers of these products tend to be less affected by the recession and the associated macroeconomic factors. For example Jaguar Land Rover’s latest quarter retail sales are up from the previous two quarters. Rolls Royce reached a record £1.16bn profit in 2012, in the midst of austerity.
Overall I agree with the view that macroeconomic factors determine the success of estate agents in the UK far more than they determine the success of businesses in other industries. However it is always important to consider that almost all industries are affected by macroeconomic factors.