With Jersey house prices at “record high”, as the industry likes to characterise the housing bubble and the economic and financial conditions tightening, buying a property increasingly becomes a betting.
With the Jersey house price index up by more than 30% between the end of 2019 and the third quarter of 2022, the property transactions seem far from the fair exchange of goods in the market and resemble a wealth redistribution scheme. In a single transaction, the buyers become poorer and the sellers – richer.
Not buying anywhere near the current asking price levels is a financially prudent decision for the buyers; however, if you need to buy, you need to negotiate a price that does not put you in a strained financial condition for the years to come.
Objectives of the negotiation
In this case, the objectives of the negotiation are simple: achieve a fair price for the property through substantial reduction to reflect the economic conditions, pressures on incomes, rising interest rates and the obvious fact of the overpriced market; reduce the amount of borrowing.
In the current market environment, where incomes are under pressure and property prices are expected to decline, as a consensus among most of the major economic think tanks, there is no economic rationale to pay higher than the fair price.
The current prices are not fair.
A fair price is achieved in transactions where both the buyer and seller are willing to transact, are not under pressure to transact and are informed. Let’s break this down.
If the seller is unwilling to transact (i.e., indifferent), the pricing of the property will not reflect the realistically expected market price. Specifically, for the Jersey market, it is obvious that even after a month of the virtually halted market, many sellers and their agents post properties to the marketplace for significantly overstated prices. These are not the market prices. Those who want to sell ask 10-20% less than at the end of August.
Neither seller nor the buyer must be under pressure to transact. This was not the case between 2020 and September 2022, when many buyers were under psychological pressure to buy to “benefit from the low-interest rates” and were misled by the dishonest marketing techniques of the real estate agents.
The buyer must also have complete information about the property in question. With properties going under offer in a matter of days, few buyers were standing back and asking the “what am I buying?” question.
So the price formed during the last 12 months technically is not reflective of the fair valuation of the properties.
What is the fair price?
The fair house price is much lower. As discussed in our article last month, if we assumed the property pricing was fair during the 18 months preceding October 2022, to achieve a monthly payments parity, the property prices would need to adjust 23.4% downwards for a prevailing 5% interest environment and about 30% if the 6% interest environment prevails.
With the fixed rates currently hovering around 6%, we think that the properties priced at £450,000 previously, if the monthly payments were to be in par, must be priced at around £320,000. This may look surprising if you ignore that a consistent monetary loosening fueled the more than a decade-long property price balloon at the base interest rates below 1%. Interest rates above 3% and soon possibly 4% must bring significant corrections.
Certain support for the pricing can be achieved through the actual and expected salary increase. However, we do not expect double-digit growth in the metric because salary growth is what the central banks are currently trying to stop.
Overall, although the table above only shows the sensitivity of the prices to one input – mortgage interest rates and other factors also affect the pricing, adding downward pressure or support to the prices, for the property price negotiation, mortgage payment-based sensitivity is a good starting point.
Anchoring the expectations
Some of our readers noticed a strange pattern in the behaviour of property asking prices starting from august, just when the pricing pressures started to mount. The asking prices posted for new properties online seemed counterintuitively high.
The hypothesis is, and that is a known concept in the practice of negotiations, that the real estate agents were artificially inflating the prices in anticipation of greater negotiation power of the buyers in the upcoming markets. The goal is simple: start the negotiation from the highest possible point and achieve the price which is still acceptable for you.
The counter-strategy to this dishonest market practice is simple. Complete ignorance of the asking prices and placing an offer which seems reasonable and financially viable from the buyer’s perspective. This will allow us to anchor the price to an acceptable level and reach a negotiated price at an acceptable level for the buyer.
As a reminder: the acceptable price should be fair, hence not putting the buyer in a financially unstable and unsustainable situation and resulting in wealth redistribution.
Market liquidity
The buyers should understand clearly: real estate is an illiquid asset. Although the property could seem liquid due to the unprecedented lending, it’s still illiquid, meaning that a quick sale means large discounts, and high prices mean long or very long marketing periods.
Added to the general level of illiquidity, the market is currently experiencing a repricing period, meaning many buyers are on hold. The sellers, who need to sell, must accept the usual liquidity discount on the properties. And this is fair. The buyer-turned-seller in the future will be facing the same pressures. The fair value in the current transaction should price in the expected difficulties to rent or sell the asset in the future.
Summary
To summarize the first part of our property price negotiation series:
- Be mindful that the fair value of the properties depends on interest rates: higher interest rates mean lower house prices. Do not pay the asking house prices formed at the historically low-interest rate environment.
- The current pricing practice in the market is apparently to create an anchor price and result in a negotiated price which will still exceed the fair value and hence result in wealth redistribution. Unanchor the expectations by proposing the price which works for you without resulting in significant loan balance or loss through further property price declines
- Real estate is an illiquid asset and subject to judgements in pricing. When negotiating the price, be mindful of the illiquidity you will experience when selling it. The current price must be adjusted to reflect the illiquidity and costs of upkeep or managing the property.
To be continued.
