Going, going, gone

Is The Joneses the first casualty of the end of the property boom?

The Dominion Post

For the past decade the real estate profession has virtually had a licence to print money. Property prices - and real estate agency profits - have boomed on the back of a surging property market, driven largely by a growing economy, an international property boom and the Kiwi obsession with owning a slice of the Pavlova Paradise.

But a storm is gathering. A string of property indicators this year shows - at best - a stagnant market, but more likely falling prices in 2008.

Add to this The Joneses, a fixed-fee real estate chain, calling in the liquidators this week and the picture begins to look still worse.

Real Estate Institute figures show houses are taking much longer to sell and house prices are falling. This month's figures show the national median house price is down from $345,000 in December to $340,000 in January, compared with $352,000 in November.

With the collapse of The Joneses, 300 sellers are having to find new agents. One hundred and seventy of the agent's vendors are out of pocket - more than $3000 in some cases.

How did The Joneses operate?Unlike traditional agencies, which generate profit through agents' commissions, The Joneses charged a fixed fee of $8995 to sell "a cottage or a castle". The Joneses entered the market in late 2006. Agents, who were shareholders in the firm, were paid a salary.

Director Chris Taylor said at the time that Kiwis were paying $1.25 billion a year in commission for "indifferent" service - it took no more work to sell a $2 million property than a $200,000 one. With other agents charging between 2 per cent and 4 per cent according to the value of the property, a vendor selling a $1 million house with The Joneses could save about $20,000, he said.

And for a while it seemed to be working. Staff numbers quadrupled in the first year as the agency expanded from Wellington to Auckland, Dunedin and Christchurch.

Management followed an aggressive strategy, branding the agency as a "rebel" firm by regularly criticising the rest of the profession - and incurring their wrath. This ended in a showdown last year when Mr Taylor faced a professional disciplinary hearing on his critical comments.

Bob Hargreaves, of Massey University's Real Estate Unit, says: "In a way they battled the real estate industry."

So why did The Joneses collapse?In December, just 14 months after emerging on the scene, The Joneses announced it planned to list on the sharemarket early this year, with the intention of more than doubling its agencies.

But on Monday morning management of The Joneses announced it was no longer proceeding with the listing because of "insufficient new capital". By lunchtime the company had gone into liquidation.

Commentators say the collapse is not an isolated event - it happened, in part, because the profession hit tough times.

Professor Hargreaves says The Joneses' infrastructure costs, including staff wages, made it harder to weather a downturn.

"Unless you're well buffered with cash, that model is going to have difficulties."

Also, as a new player it faced huge marketing and advertising costs in newspapers and television, as it worked to gain market share.

A financial statement provided by the company in November showed it was in trouble, with liabilities in excess of tangible assets.

But The Joneses management blames a volatile sharemarket for its collapse.

Mr Taylor says that though investors initially responded positively to the sharemarket float, this turned sour as equity markets and property prices fell.

How does it affect The Joneses' clients? Meltzer Mason Heath, which has been appointed liquidator, says 170 vendors have lost money. Amounts vary from just a few dollars to more than $3000 in fees paid to cover advertising, photography and open homes.

The Joneses has cancelled all sales and told vendors to get another agent.

Consumer NZ chief executive Sue Chetwin says anyone who listed with The Joneses should contact the receiver and get a good property lawyer.

Rival agents have already swooped on some vendors, and uncertainty over the situation has left many feeling vulnerable.

"A good lawyer, as with any real estate deal, is crucial," Ms Chetwin says. "They should also be very careful of taking anything that other real estate agents say as gospel."

What about the rest of the profession? The collapse of The Joneses has made the profession sit up, Massey University property lecturer Raewyn Fortes says. "It will have a flow-on effect. Some of the other fixed-term commission agents will be analysing their models also."

She believes The Joneses may not be the only casualty. A number of small players have been attempting to break into the market and they too could fall victim.

The major agencies that run on commission will not feel the pinch as much as their agents. They still have costs such as office space, but do not have salary overheads.

Instead, a number of agents are expected to pack up. Professor Hargreaves says that even in a healthy market, agent turnover is around 30 per cent.

"It is such a competitive industry and it will become more dog-eat-dog as volumes dry up."

So is the property market doomed? "We're moving into a buyer's market," Professor Hargreaves says. Sellers are now having to negotiate and buyers are more likely to pick up a bargain.

Real Estate Institute figures show that instead of selling more than 7,500 houses a month as they were 12 months ago, agents sold just 5186 nationally last month. And instead of taking a little over 20 days to sell, houses now average 38 days.

But the market has not collapsed yet. Professor Hargreaves says the profession's cyclical nature means there will always be downturns. "What we don't know is just how far it will go. There are so many variable factors."

These include overseas markets, with the subprime mortgage crisis in the United States beginning to affect the confidence of New Zealand's banks, he says.

Murray Cleland, president of the Real Estate Institute, says central Auckland has had the biggest drop. Results are mixed, however, with median prices falling in seven regions and rising in five. The key theme is "unpredictability".

"People need to be prepared for prices to move back in 2008 ,which may have consequences for those that are heavily geared, especially those with multiple rental properties in that situation at a time of rising interest rates."

Is this the end for non-traditional real estate models?It appears not. Internet-based real estate trade is booming. Trade Me commercial head Michael O'Donnell says listings have increased massively this year. In the past two weeks they have gone up from 59,000 to 61,000.

But the bulk of listings - 90 per cent - are through agencies, (which had included The Joneses), rather than private trade.

Ms Fortes says there has been growth in the private sales market and research shows buyers are commanding prices comparable to those achieved by agents.

Alternative agencies, such as Go Gecko - which also charges a flat fee - and companies, such as Green Door and Home Sell - which offer marketing packages to help sellers - report positive trading conditions.

"Inherently, I don't think the model is bad," Professor Hargreaves says.