Sir, - The potential for gazumping seems to lie in the 30 days or so that elapse between the placing of the (seemingly legally meaningless) booking deposit and the signing of the actual contract.
The ongoing debate strikes me as having overlooked one potential solution. That is, the application of modern finance theory, in particular contingent claims analysis, to the housing arena. Every day, options on commodities, on financial claims and instruments, on corporate liabilities and indeed on other options, to an underlying value of trillions of punts, are traded worldwide. All of these are legally enforceable contracts, but with what, in layman's terms, may be called letout clauses. This, it appears to me, is exactly what is required in the housing area. A housing option might take the form of an exchange of monies such that the potential purchaser has the right, but not the obligation, to purchase the house from the builder. at an agreed price at an agreed date.
This has a structure exactly like that of a call option - the right on the part of the purchasers, but not the obligation, to call in or purchase something from the market. The cost of this option is paid by the potential purchaser to the vendor, and in the event of the potential purchaser deciding not to purchase the vendor keeps the money. Thus, both sides are protected.
Clearly, the cost of the option will determine the degree to which persons will take it up. If too expensive, persons may decline to take it, and thus expose themselves to adverse price movements. It should be noted that while an option to absolutely protect the price may be expensive, the price of an option that allows for the possible increase to a small degree will be much less. - Yours, etc., Brian M. Lucey,
Lecturer in Finance, School of Business Studies, Trinity College, Dublin.