Why Buying at the Market Bottom Is Mostly Luck

In 2012 a friend of mine bought a two bedroom flat for 185,000. Prices in her area had fallen for three years straight, and she was convinced they had hit bottom. She was right. Four years later the flat was valued at 260,000, and she has told the story at every dinner party since as proof that she understands the property market.

Around the same time, another friend waited. He was also convinced prices were near the bottom, but he wanted to see one more quarter of falls to be sure. Prices turned instead, and he spent the next three years chasing a market that kept rising away from him. He is not less intelligent than the first friend. He simply guessed a few months differently.

Timing the bottom of a property market is one of the most admired skills in investing, and in my experience it is mostly luck.

Why nobody sees the bottom in real time

A market bottom is only visible in hindsight. At the time, it looks exactly like any other month of a falling market: bad headlines, cautious lenders, sellers cutting prices. The data that would confirm the turn, sales volumes, price indexes and mortgage approvals, arrives weeks or months late.

By the time the numbers clearly show that prices have turned, they have usually already risen a few percent. So even buyers who follow the data closely end up buying either slightly before the bottom or slightly after it, and which one they get is largely chance.

One of my clients, who has invested in rental property for twenty years, compared it to picking a match result on a pool site like ankertoto. You can study the form, the injuries and the history, and it helps a little. But the result still depends on things you cannot see, and the people who call it right once tend to believe they will call it right every time.

What the lucky buyers actually got right

When I look closely at buyers who did well after a downturn, their success rarely came from perfect timing. It came from a few boring decisions that would have worked reasonably well at almost any point in the cycle.

My first friend would have done well if she had bought a year earlier or a year later, because she bought a sensible flat, fixed her rate and stayed put. The timing added some gain. The fundamentals did most of the work.

The advice I disagree with: wait for prices to drop

Whenever the market wobbles, buyers hear the same advice from friends and online forums. Wait. Prices are going to fall further. Buy when things are cheaper.

For someone buying a home to live in, I think this is usually poor advice. While you wait, you are paying rent, which is money you never see again. You may also be waiting through interest rate changes that cost more than any price fall saves. And you are relying on your ability to recognize the bottom, which, as above, almost nobody can do.

A more useful question is whether this home, at this price, works for you over the next ten years. If it does, the exact timing matters much less than it feels. If it does not, a lower price next year will not fix it. The numbers behind that decision are covered in how much house you can afford this year.

A timing approach that does not depend on luck

Investors who buy several properties over a career tend to avoid the timing problem entirely. Instead of trying to call the bottom, they buy steadily when the numbers work and hold for a long time. Buying one property every few years spreads the timing risk, the same way regular saving smooths out the ups and downs of the stock market.

For buyers purchasing just one home, the equivalent is simpler:

• Buy when your own finances are ready, not when the headlines say so.
• Check that the rent to price ratio makes sense in your chosen area.
• Stress test your mortgage at two percentage points above today's rate.
• Plan to stay long enough that a short term dip does not force a sale.

If you are investing rather than buying to live in, the same logic applies with more emphasis on rental yield. Calculated risk: what investors borrow from gamblers covers how experienced landlords think about the odds.

What my two friends taught me

My second friend did eventually buy, in 2016, at about 30 percent more than he would have paid in 2012. He has done fine too. His flat has risen in value, his mortgage is manageable, and he has lived somewhere he likes for nearly a decade. His result was worse than it might have been, but it was not a disaster, because he also bought sensibly once he finally bought.

The lesson I draw is not that timing does not matter. It is that timing is the part you control least, so it deserves the least of your attention. More on making these decisions calmly is in our Investing section.