Disclosure: I am implementing a property search solution platform - findigl. findigl uses data to significantly enhance the ability of buyers and sellers to understand the property market better. Please do your own research and don't take this article as financial opinion or advice.
Time value of money and Time preference
Time Preference is the preference over less money now, versus more money in the future. i.e. would you rather Fred paid you back the ten pounds you lent him now, or £15 at the end of the month?
Time value of money is beyond most people in that discount rates should be applied to accurately determine whether money is better in your hand versus with a relying counterparty and waiting for a higher return in the future. Circumstances can cause people to suddenly want their money now - imminent mortality for one.
In normal markets - money invested returns more money over time through interest earned. It makes sense to wait for money to be returned.
Buyers and sellers abstract the market to simplify it
Aside from sophisticated investors, we abstract the market to the point where the decision made is justifiable. A house purchased which has increased by £800k sounds like a wise decision but reverse that and it is disastrous. We cannot analyse all data points and realise it was better to rent a property in London than to buy a property which dropped by £300k.
We fail to understand how illiquid property is and how much government manipulates the price
The one thing I believe in, is free markets. Unfortunately, a prime function of government seems to be to control prices. This sounds like exactly what most people want, but markets are better at establishing price than interference. We are told that prices have increased too high for property and we can no longer afford them, but the reality is government has suppressed wages through inflation. Mortgage debt is securitised, which is then counted as an asset on the balance sheet of the UK thereby enabling government to issue more debt to other countries as gilts.
If you followed the above, the end product is we have to focus on one outcome - buying property for as low a price as possible. Our emotion has to be completely detached from the process and if, and when government decides to manipulate the price to the downside, we are least affected by it. We also have to take profit when we can. We shouldn't exist on fear that house prices always increase, and we will never re-enter a market.
Declining asset values?
What happens when an asset is depreciating in value, the longer that asset is held for, the more its value drops? We panic. We lose our minds, and we jump into the crazy world where we have to get rid of the asset as quickly as we can. Having been involved in cryptocurrency markets, and survived the huge ups and downs over shorter timescales shows we need to be strong and remove emotion.
A tweet by Henry Pryor
My commercial twitter account for findigl follows Henry Pryor. He is a property expert and BBC personality. To be honest, he is pretty good and supplies a lot of good ideas.
The tweet goes -
"Charming 3 Bed flat in South Kensington. · Seller paid £2.4m in 2012. · Put it on the market in February asking £2.35m. · This week he sold it for £1.725m. Guess who had a #BuyingAgent ?"
Analysing markets more closely
What I have noticed, is most buying agents are focusing on higher-end properties. We know higher-end properties have additional stamp duty costs, but are a great way to lock away capital into an asset which is seen by most in the market as a guaranteed cash-cow. Property can only go up.
Property is the only asset which is protected to the full value of the property which I know of without suffering counterparty risk. This is because conveyancing officially registers the titles with land registry and government upholds the ownership of the property. The Crown (Queen) is the unofficial owner of all property in the UK but that has never been exercised to my understanding. Similarly, once the owner dies - the estate is protected. This isn't true in many corrupt countries with land ownership rights being a real challenge.
Here are some observations;
- Higher value properties suffer bigger variance in price during market highs and lows.
- Those who have made a big profit will accept a bid below market price to retain profit. i.e. a person who bought a house for £3 million, saw it's value increase to £5 million will accept £4 million. A person who bought a house for £3 million will accept £2.75 million if they think the house could drop to £2 million.
- A 10% decline on a £3 million house sounds far bigger than a 10% decline on a £100,000 house. £300,000 versus £10,000.
- £10,000 means as much to many people as £300,000 to another.
- Paying for a buying agent and the implicit sale value for £10,000 isn't as appealing as saving £300,000.
The biggest observation is - when a market is falling, it is falling. The example given by Helen is an apparent reduction in price in a market which is flat or slightly increasing. What we find though, is that higher value properties, especially in Kensington are declining in value whereas lower value properties are slightly up.
Plot price value by number of bedrooms normalised by area to understand the point
As Jordan Peterson often says - "The devil is in the detail", he also says "Give the devil his due" but this is irrelevant :). When we look at a bar chart of house prices, we see that the more bedrooms a property has doesn't increase in value proportionally, it flattens. Adding more bedrooms doesn't proportionally increase the value of the house. We can find 1 bedroom houses in London between £300k to £500k, and 4 bedrooms at £650k to £1 million.
Without analysing all these types of subtleties, we will never be able to come out with sweeping statements like - Buying Agents save you money. It is highly unlikely they are data experts like me and take the time to analyse the market data, to fully exploiting bigger savings. They simply focus on higher-end properties because they show the biggest saving.
Diamonds as an example of market verticals
If you are unlucky enough (or lucky) to be made to fork out on an engagement ring, you will learn about the four qualities of a diamond - Cut, Colour, Carat and Clarity. These are the four fundamentals of a diamond's price. An interesting observation is that another metric is that diamonds can show difference in prices for industrial diamonds.
An entirely different market exists for diamonds to which we understand. It is the same as in real estate. We view property in terms of what we are looking for, but people with different requirements are existing in completely separate verticals to ourselves.
This means that the narrative may dictate that property prices are decreasing but without counting for the subtleties of the sub-markets. Maybe 1-2 bedroom properties are more affected by price drops or maybe they are not.
So are buying agents any good?
I propose that the fundamental features of a property are as follows;
- Its location.
- Its amenities.
- Its features.
- The size of the market for location, amenities and features.
To understand these fundamentals requires significant data analysis and a mechanism to hone in on bargains and profits. I do not believe that your above average estate agent has the skills and capabilities to constantly monitor the market to find maximum utility for their customers. There are too many data points. This new focus on Buying Agents, to me, seems like an attempt to extract some juice from a stagnant market.
To say that Buying Agents don't work is harsh, but are they actually saving money or just capitalising on a normal market condition? Buying Agents can put the veneer on top of a data platform like what findigl will become.