The 5-8 year short term debt cycle enters its new phase. After unprecedented growth, we move into contraction. Since the GFC world banks have flooded the market with cheap credit. Cheap money leads to an increased supply of cash. People rushed to the banks, borrowed money at low-interest rates and bought. They bought houses, cars, trips overseas, filled those houses with goods and services. It’s been great. Every time you spend, you help someone else earn an income. That’s the growth phase in the economy. As peoples income grow they spend more, asset prices increase with more demand, and generally, the overall population feels wealthy.
You then reach a point, where consumers come to the end of their borrowing capacity. They can’t get an extra $1m from the bank, so in the last run of growth to keep up these new lifestyles, they rush to last-minute financial products, like credit cards and now AfterPay, which is non-assessed credit. They finally realise that they can’t keep spending as they have, and at some stage, they need to start repaying the debt they’ve accumulated.
The mood of the market changes and people begin to repay the debt; they pull in their spending. As they do that peoples income drops as fewer people are spending as much money in the economy, and there begins the contractionary phase of the cycle.
Some people are forced to sell assets, as income drops, they can’t service their loans, and as there are fewer people in the economy to spend cash, asset prices come back. With more supply of houses and less income production, that fuels media speculation about a house price crash. The reality is the government usually then steps in at the appropriate points to help the economy land softly - measures like a first home owner grant, reduction in stamp duty, reduction in interest rates or government grants like the famous $1,000 tv grant, are put in play to re-stimulate the economy. We call that the short term debt cycle, and it happens over and over again over a 5-8 year period. The great thing is once you know it, you can read the market, so you know what to do next. Ray Dalio’s 30-minute video on economic principles is a much watch. https://www.youtube.com/watch?v=PHe0bXAIuk0
What’s fascinating is media commentary and poorly articulated opinions by market commentators send shockwaves across the general public. In January alone headlines like Auctions no longer work, sets panic into the market. These headlines are backed by stats, 800 properties sold in Sydney this week via for sale, and only eight via auction. Industry specialists know the auction market doesn’t return until mid-February, but yet the unhelpful headlines persist. Remember if for sale is so successful, why they don’t publish a for sale clearance rate at day 28, so we can measure apples with apples? The truth - as days on market increase, great agents need a process to sell properties in 28 days or less.
So here’s how to ride the rapids, and produce more income than ever before, regardless of the economic cycles.
Invest in relationships
The depth of the relationship demonstrates the real needs of the customer. Customers only move if they are dissatisfied, have a vision they are compelled towards and are prepared to make the first steps. You build relationships by being relevant, frequent and consistent. Relevancy determines frequency. When there is a listing or sale, pick up the phone, let your customer know, because you care. Be interested.
The decline of social spends with digital saturation
Technology doesn’t recognise recessions or economic uncertainty. It maintains its progress. However, as it does, plenty is caught out investing in areas that won’t yield results. Social is billed as the great panacea; however, when everyone including retailers and big corporates rushing to attract more of the eyeballs, we start seeing spends increase to get in front of fewer customers as there’s so much demand for eyeballs that can only consume so much social content. The other challenge is curation. Newspapers, when they were at their best, were great, general news was at the front, followed by business, TV guide, classifieds including motoring and real estate then sport. Social, however, is all of that all of the time in no order - it’s a mess at best. Phone addiction is real, and big techs recognition of it is starting. Apple's release of screen time is making people aware of what they are doing. And anecdotal evidence is people are switching out. Well thought out, engaging content and strategies always win, powerful stories etc., but seeing an agent post about 'open for inspection life' has run its course. As incomes contract, my prediction is it’ll be the first things agents cut from their spend.
Increases in average fee
In the previous set of conditions, it didn’t matter who you chose; properties would sell. In the new market, the agent you employ has a massive bearing on if you’ll get sold. The ability to navigate the conditions of the day, to achieve a sale, to know what to do, make you worth more than you’ve ever been before. Increased service levels, combined with ever precious consumers, clearly demonstrates that leaders will lead, and slowly increase fees. Margins are required, as you need profits to reinvest, to reinvent the service. .5% might not sound a lot, but for some businesses, that’s a 25% increase in total fees per transaction. If volumes drop in sales (which they will in some markets, but not in others) than fee growth is critical for surviving and then thriving.
Mergers and acquisitions
New agencies that have opened over the last five years and have relied on sales income alone to cover fixed costs will have to tighten their budgets. Ideally, you want re-occurring revenue models, like property management and the blended fee like finance, conveyancing and connection referral fees, to drive more revenue. That reoccurring revenue needs to meet fixed costs so that sales revenue can be the profit or cream. Even agencies that bought property management rent rolls will have some challenges, especially if those revenue streams are funding rent roll debt from the purchase and not yet contributing to covering fixed costs. The logical move is mergers with other firms and acquisitions, which is ok, as with scale comes massive opportunities for cost savings and bigger play strategies especially around where Landlords live. New strategies around increasing total customer spend, the lifetime value of a customer and the frequency of spend will nail overall growth.
10-15% fewer agents required
Some heat will come out of boom markets, like project sales, apartment sales and the speculators, which will see in some markets periods of adjustment, requiring fewer agents to service the market. We’re already seeing it. A changing of the guard as some retire, move on or fail to adapt. It’s refreshing as great agents take market share and the great renewal in business savvy agents emerge.
Lead source shift
With fewer attendees generally at open homes, new lead sources will need to be worked. Personal networks, past clients, social proof marketing, and Landlords will create plenty of opportunities if you adapt. If you only rely on opens, you open your business to risk.
Overall this is an incredible market. Australia is one of the best markets in the world. We have a relatively stable government, amazing real estate, tightly controlled credit markets to prevent bank failures, great revenue opportunities and an appetite to buy the great Australian dream.
This is the market when great agents are made. They’ll thrive in these turbulent conditions. With an election, Easter and potential changes to Capital Gains Tax and Negative Gearing there’s plenty to keep ahead of, but we predict that our clients will have the best year of their career by sticking to the basics and placing bit bets on tried and true methods of being a real deal maker.
This article first appeared on Elite Agent: https://eliteagent.com/the-real-deal-josh-phegan/