Only 4% of people who buy a property take advice. Despite only participating in the market on average once every 7 years the average home buyer sets out to make what is usually the biggest single purchase of their lives armed with a conveyancing lawyer and a British assumption of fair play. Their knowledge of the market is based upon what their mates have told them, what they read in the papers and research on the internet.
In the course of looking for a new home the typical buyer hops into the back of a branded mini driven by a representative of the seller and proceeds to tell, in excruciating detail their full circumstances. Why they want to move, what they really want, how much they have to spend, when they want to move and just how much their parents or in-laws will help if they find exactly the right thing for too much money.
If they are lucky the nice estate agent will recommend a mortgage broker who may then pay the agent for the introduction and the broker will be able to check exactly how much the potential buyer is able to raise – or offer. (The OFT did at least say they would look into this in their uninspiring report into estate agency published last week). The Council of Mortgage Lenders (CML) says that the average buyer is borrowing three times the amount they have saved.
When the buyer eventually finds something, the estate agents (representing and paid by the seller) will then use all this freely imparted information against the buyer to extract the best deal on behalf of their client.
Although the buyer is no expert, he will usually negotiate the deal both on behalf of himself and the bank who is lending him three times what he is putting in. The lender will usually check their money is safe by getting the buyer to pay for a mortgage valuation that only they, the lender can rely upon. This is the only check that is done on the price that has been agreed and it is really only to ensure that if something goes wrong the bank can get their money back. Its the borrowers money that goes first if it turns out that the property is worth less than the self-appointed expert paid for it.
Despite the predictions of many (including myself) house prices have recovered over the past year. Some have put this down to supply and demand. We know that there are only half the number of properties for sale that there would usually be and the 800,000 homes that sold last year across the whole of the UK is just half the 1.6m sold in each of 2006 and 2007. Demand appears to be high with over 2.5m people search the biggest property web sites in January alone.
Might the rise be partly down to the fact that the number of cash buyers, with no borrowings and so no mortgage valuation check, has roughly doubled over the past 18 months?
As well as lottery winners, ‘cash buyers’ include those trading down to smaller, cheaper homes as well as those coming from abroad. The CML has kindly updated their research for me into the number of cash buyers each month that they originally produced as part of their revealing paper ‘The Changing Nature of Property Sales. As a result, I calculate that typically there are around 27,000 cash buyers each month but as the volume of sales has plummeted in the last two years as a percentage this number has increased. From 17.1% through 2005 to 33.9% last December!
The average number of buyers who didnt need a mortgage through 2008 and 2009 was 32.5%.
Without the partial check of a mortgage valuation, are cash buyers who negotiate on their own paying more for the properties they are buying and are these inflated deals helping to push up the average price indices?
If you negotiated a discount from the asking price of 15% would you feel that you had got a good deal? What if that asking price was 10% higher than it should have been? With so few instructions, some agents are valuing for instruction hoping to get business by inflating the vendors expectations – and egos. We have seen the gap between asking prices as recorded by web site Rightmove.co.uk and sale prices recorded by the likes of the Halifax and Land Registry increase over the same period. In 2005 the gap was £24,758. Last year it was a massive £53,219!
It does look as if those who are buying are negotiating hard but what these statistics dont tell us is whether the properties were actually worth what the sellers were originally asking in the first place. Asking prices didnt fall anything like as far as sale prices did during the credit crunch so perhaps these numbers dont tell the whole story. The average estate agent may not be top of the Mensa tables but what they do day in, day out and having seen the buyers hand almost always gives them the edge in negotiations. Perhaps cash buyers are paying too much for properties in a market that has caught out most experts. As the old saying goes, A fool and his money are soon parted.