IRELAND’S SYSTEM OF house-buying may cause bidding wars, inflate prices and cause panic spending.

Wow, who woulda thunk it?

The findings are contained in a new report from the ESRI think tank, which took a deep dive into the psychological aspect of how property is bought and sold here.

Now, ‘system of house-buying’ is admittedly a broad way to paint the study. The real focus was on how buyers bid on properties. Many people may not know that Ireland’s system actually differs from many other countries in how it works.

We have what the ESRI describes as an ‘open offer’ framework. Essentially, this talks about how property bids are handled.

Sellers set an asking price. Buyers send bids to an estate agent. Sellers are free to consider multiple offers and multiple rounds of negotiation, until a ‘highest bidder’ is selected.

Crucially, prospective buyers are told if someone else has put in a larger bid than them, encouraging them to pay more. The ESRI noted this is very similar to holding an auction.

The other key feature of the ‘open offer’ system is that neither buyers nor sellers are ‘locked in’ for the majority of the house buying process.

Buyers can suddenly choose to back out, and sellers can suddenly pull the property. At least, up until the point where contracts are signed.

‘Open offer’ may seem like the natural way of doing things, as it is the only system for buying property most Irish people will ever have encountered.

It is also very similar to the system in other Anglophone countries, such as England, Australia and the US.

However, other countries have different systems. One used in Scotland is referred to as ‘sealed offer’, which the ESRI examined in detail.

In this system, a solicitor receives all the bids on behalf of the seller, rather than an estate agent. There are two key differences:

• One: offers are confidential – bidders don’t know what others are offering.

Bidders submit a single sealed bid through their solicitor by a fixed closing date.

The seller may choose the best of these, although they are not legally obliged to do so, and can interact directly with a specific bidder if they wish. One bidder does not know what the other is offering.

• Two: Buyers / sellers are more ‘locked in’

Under the sealed bidding system, once a seller accepts an offer, they can technically pull out until contracts are signed, like in Ireland’s ‘open offer’ system.

But in practice, there are barriers to doing so.

The key barrier – solicitors only act on a ‘one time basis’. What this means is that, if a seller accepts an offer and then changes their mind, they have to find a new solicitor to restart the sales process.

The same goes for buyers. If a buyer reneges on an offer without “legitimate reasons”, their solicitor is obliged to withdraw their services.

Finding a new solicitor can be costly and time-consuming, so it encourages both parties to stick to their decision.

These two key changes make the ‘sealed’ system more secure and rigid than the ‘open offer’ one, which often results in bidding wars and deals suddenly collapsing.

Psychological

So, we mentioned that the ESRI study looked at the psychological impact of Ireland’s ‘open’ system. So what is it?

In a nutshell – it encourages ‘loss aversion’ thinking, leading to people becoming desperate and willing to pay higher prices.

This can then lead to panic buying, inflated prices, and all those other factors we mentioned earlier. These things can obviously be good from a seller’s point of view, in making more money. Not so great for the buyer.

The ESRI noted that a particular concern under ‘open offer’ is for sellers to suddenly accept a higher offer from another bidder before contracts are signed. This is generally referred to as ‘gazumping’.

“Buyers who experience being gazumped will be more willing to stretch themselves financially,” the study said.

This could take the form of putting in another, higher bid on the ‘gazumped’ property. Or just making larger bids on other properties, to avoid being ‘gazumped’ again.

There’s also the fear of ‘ghost bids’. That is, estate agents reporting fictitious bids to prospective buyers to drive up prices.

While there is legislation against this, the ESRI noted that the prevalence of ghost bidding “is unknown, since it is essentially impossible to measure”.

The upshot of all of this is normally the same – buyers are willing to spend more money.

Another downside to ‘open offer’ is that it encourages ‘herding’.

Related Reads

Micheál Martin says Budget won't expand First Home Scheme to cover second-hand homes

One-off housing policy shift will allow people build homes on their own land, says Taoiseach

It could soon be more difficult to take a judicial review as new law to refocus on ‘common good’

This is where a buyer bases their decision on what others are doing, rather than on independent judgment.

It’s a particular problem under ‘open offer’ because a buyer is normally told how other bidders are interested in a property, and how much they’re willing to pay.

This creates a ‘FOMO (fear of missing out) effect’, where loss aversion kicks in.

The end result is similar to someone being gazumped – the buyer is more likely to inflate their bid.

By contrast, ‘herding’ is less likely because bidders don’t know how many others are bidding on a property. They also don’t know what the offers are.

Spend more

Overall, the ESRI found that most features of Ireland’s ‘open offer’ system generally encourages prospective buyers to spend more money than they intended.

All features encourage feelings of panic. This can also work in reverse when prices are falling, such as during the financial crisis. ‘Herding’ behavior kicked in, and prices dropped very suddenly. Although, obviously, the concerns around rising prices are the ones which are more relevant to the current market.

The study makes the case that moving to a ‘sealed’ system would help to smooth things out considerably.

By ensuring that prospective buyers don’t know what others are bidding, there’s no feedback loop to encourage more spending. This means people would be less incentivised to stretch themselves financially, and more likely to only offer what they genuinely felt a property was worth.

“The findings of behavioural economics appear to favour a sealed bid process over an open offer one,” the ESRI concluded.

But while the study is hopeful in calling for a sealed system, it’s unclear how much support the idea will garner.

After all, the ‘open offer’ system encourages driving up prices, particularly given Ireland’s current market.

And more importantly – it’s what Irish people know. When it comes to property, culture and attitudes are hard to shift.