Buying a house? Do the deal now

I’ve been sniffing around the London property market recently. Beside the normal hassle of buying a property, there’s an extra helping of London hassle.

I’ve been sniffing around the London property market recently. You don’t need me to tell you it’s mayhem out there.

Beside the normal hassle of buying a property in a normal place, there’s an extra helping of London hassle.

Everyone here is either mortgaged up to the eyeballs, or looking to trade up and get mortgaged up to the eyeballs. Every transaction has a “chain” a mile long.

What’s a chain? When you’re buying a house, normally the seller is planning to move to another house, for which they need a buyer. And the buyer of that house usually needs a seller for their existing house. And on and on for eternity.

House prices are so high in London that they make up the vast majority of most people’s wealth. With no chance of financing the purchase any other way than selling the old house, these chains get incredibly long and complicated.

If any one buyer or seller anywhere along the chain gets cold feet, or spots a nicer house on the same budget, the whole thing collapses. And it’s back to the drawing board. (The solicitors keep their fees though.)

All of which is to say that buying a property is a lot of hassle. I get that.

But here’s the thing. If you’re in the process of buying, it’s important you get everything wrapped up ASAP – the sooner the better. Here’s why.

(Sellers: there’s something in this for you too!)

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Don’t get fleeced this summer

The charts of house prices you see in the paper are usually wrong in a subtle, though important, difference. They tend to slope smoothly up (or down) from year to year. But that doesn’t describe house prices in reality. It ignores something called seasonality.

In reality, house prices tend to peak in July and bottom out around January. The number of transactions and the price of houses goes up when the weather gets warm. It’s like there’s a mini housing boom and crash every single year!

I learned all this from an old paper by Rachel Ngai and Silvan Tenyro. You can read the paper here. Here’s part of the abstract:

“While the boom-to-bust episodes motivating the extant work are relatively infrequent and of unpredictable timing, this paper shows that in several housing markets, booms and busts are just as frequent and predictable as the seasons. In particular, in most regions of the UK and the US, every year a housing boom of considerable magnitude takes place in the second and third quarters of the calendar year (the “hot season”), followed by a bust in the fourth and first quarters (the “cold season”). The predictable nature of house price fluctuations (and transactions) is furthermore confirmed by estate agents, who in conversations with the authors observed that during winter months there is less activity and “owners tend to sell at a discount.”

And why is it that buyers aren’t made aware of this? According to the authors, it’s in the interests of the industry to keep it quiet.

“Perhaps more compelling, publishers of house price indexes go to great lengths to produce seasonally adjusted versions of their indexes, usually the index that is published in the media.”

The paper was written in 2009. But data from the US Federal Reserve confirms that seasonal booms are still alive and well, in the US at least:

Winter: house prices below trend. Summer: house prices above trend.

FRED
Source: Federal Reserve Bank of St Louis

So what’s all this worth to homeowners?

The numbers are pretty big. The 2009 paper shows a 7.4% difference in growth rates between the seasons in the UK. Since rent is not seasonal, that means a buyer could rent until January and buy at a discount. Or a seller could sell in July, and rent until January. Easy money!

Just a shame I didn’t learn about this three months ago…

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