Lecturer in Quantitative Methods; Member of Centre for Globalisation Research (CGR)
Buying a home is typically the largest single transaction people will make in their lifetime. But a study of London house prices over the last two decades shows how a lack of attention to numbers by buyers and sellers can alter the price of a home by tens of thousands of pounds.
“Ninety-nine pence pricing is very commonly used in marketing,” says Dr Charlotte Meng. “That’s why you often see prices like £1.99 in shops. It’s taking advantage of people’s behaviour limitation. They look at £1.99 and think it’s just £1.
“This has been studied a lot in marketing research, but there hasn’t been much research in large-stake transactions because we tend to assume this doesn’t have any effect when the sums of money are much larger.”
Dr Meng is a Lecturer in Quantitative Methods at the School of Business and Marketing at Queen Mary University of London. As part of her PhD, Dr Meng examined house price data to see whether it could tell us anything about how people think and behave when buying and selling homes.
She continues: “A study by US researchers looked at second-hand car sales, where the car’s mileage is a key factor in price. This showed that people only look at first few digits of the mileage and there’s a huge price drop after the 10,000-mile threshold.
“So, I wondered if it could happen in house sales too.”
To find out, Dr Meng used data from the UK Land registry on house prices in London between 1995 and 2017. This allowed her to look at repeat sales for individual properties and see their postcodes, property types (flat, semi-detached, etc) and whether they were new builds. She also used the Rightmove website to get extra information on the same properties, such as how many bedrooms they had and whether they had gardens or driveways.
Her findings are explained in a recent paper ‘The price paid: Heuristic thinking and biased reference points in the housing market’, published in the Journal of Urban Economics.
Dr Meng says: “In traditional economics, we say people make decisions based on the current situation. In housing that might mean the location and the condition of the house or flat. But, if I’m thinking of selling my house, I don’t want to sell for less than I paid for it. I want to make a profit, so prices increase.
“We see this in the data. When we look at recent sales we can see that they make reference to historical sales. But when people make reference to history, they only look at part of the price, just the left two digits, which is really limited information.”
Similar to the price drops with round number mileage in second-hard car sales, Dr Meng discovered that, in house prices, people focus on the first few digits of a price, effectively rounding the price down, even when it would make more sense to round it up. This shows in the resale prices of London flats and houses with homes initially sold at round numbers, such as £230,000, attracting a 4% higher resale price than those sold at marginally lower numbers, such as £229,999 or £229,950.
Dr Meng explains: “What we see is abrupt price increases at these points. And if we think about 4% in the context of house prices, it’s a lot of money! With average house prices in London around £500,000, 4% is £20,000, so this is something we cannot ignore.
“It’s surprising to see the size of this effect at the market level.”
Dr Meng thinks that all parties involved in house sales are probably referring to a historical price and showing the same inattention.
“Sellers want to make a sale at a higher price than they bought. Estate agents want to sell at the highest price because they get commission. Even buyers agree on the price based on previous price. In fact, buyers use historical price as an indicator of the quality of the house, when really it should be the other way around with price dependant on the condition and location.”
She adds: “I would like people to be more aware of this bias in our attention. The message here is that people who are buying and selling their homes should pay closer attention to prices, and not simply round down. The stakes are too high for that.”