Packed into a suburban street, a puffer-jacketed crowd of people stamp their feet in the cold as they wait for the chance to bid on a home.
The air is charged with tension.
Young couples chasing the dream of ownership, retirees hoping to downsize and property investors rehearsing their strategies.
Each hoping they’ll be able to dive into the bidding frenzy about to begin and uniquely emerge victorious.
It’s a familiar scene to aspiring home owners across Australia.
But if you’ve ever felt the energy of a property auction firsthand, you may have wondered why we seem to be so attached to them here.
And whether the spectacle of a bunch of people waving their arms on a quiet street is really the best way to land a fair price.
Auction theory suggests open bidding offers high transparency
From Roman soldiers divvying up loot to the sale of ornate antiques across the world, auctions have been used for centuries to sell prized goods.
University of Technology Sydney economics professor Isa Hafalir says the theory behind property auctions is fairly simple.
While potential buyers might have a “private value” they’ve attached to the property based on research, at an open auction they are able to see the “common value”, by observing the public bids of others.
Plenty of interest during an auction often spurs people to reconsider a property’s worth.
“You think ‘OK, this house must be really good because lots of bidders are interested and increasing the prices, so therefore I should have a higher price for this’, and then you kind of re-evaluate your valuation,” Professor Hafalir says.
If the bids are stalling, buyers will probably scale down their private value of the property.
Auction theory assumes bidders are “risk neutral” in their behaviour, all attempting to pay a price that will be outstripped by the value of the home over the next few years.
“Under these assumptions … the auction is fully efficient,” he says.
“The highest-valued bidder will buy the object and they’re going to pay a fair price.”
Of course, human emotions run hot at auctions, which can lead to unexpected outcomes, including the “winner’s curse” — where the successful bidder realises too late they’ve forked out more than they should have in their scramble to win.
While auction fever can certainly lead people astray, Professor Hafalir says theoretical demonstrations have shown the open-auction format reduces the risk of a bidder ending up with buyer’s remorse, compared with a sale by negotiation.
“Most of the time, I would say that auctions are quite efficient,” he says.
Australia’s love of auctions isn’t matched in the US or the UK
Professor Hafalir has lived in both the United States and Australia and says the two countries have very different approaches to property auctions.
In Australia, properties going under the hammer are often sought-after homes across a range of prices.
“In the US market, a house being sold on the market sold by auction kind of signals that this is a foreclosure property, it’s not a good property,” Professor Hafalir says.
University of Queensland economics professor Flavio Menezes says it’s a similar story in the United Kingdom.
“[In the US and UK] real estate auctions are more commonly used for properties with unique characteristics,” he says.
“These may include properties under foreclosure that need to be sold at market value, luxury properties, or commercial properties.”
While auctions are more popular in Australia, the appetite varies considerably across different states and territories.
CoreLogic data from this year shows the ACT, Melbourne and Sydney are markets where you’re most likely to see a home going under the hammer.
It’s less common in Adelaide and Brisbane, while in Perth just 1.4 per cent of properties were taken to market via auction in the four weeks to June 25.
CoreLogic research director Tim Lawless says since 2021 there’s been a “subtle reduction” in the proportion of vendors taking their property to market via auction.
“This trend is more obvious in the less auction-centric markets such as Adelaide and Brisbane, where auctions temporarily comprised a much larger than normal portion of new listings as selling conditions heated up,” he says.
Why more auctions suggest a hot property market
Professor Menezes says Australia’s booming property prices have been the main driver behind the country’s embrace of auctions in recent decades.
“When a seller sets a fixed price for their property, it is often based on the recent history of prices for similar properties,” Professor Menezes says.
“However, in a rapidly growing market, such an approach underestimates the potential buyers’ willingness to pay, especially the highest possible valuation of a buyer. In a booming market, auctions prove to be highly advantageous for sellers.”
Professor Hafalir agrees auction trends offer some insight into where the wider property market is headed.
“In Australia, whenever the market is doing good, we see lots of auctions around and lots of success rates in terms of selling at auction,” he says.
“Whereas when the market is down, it is much less the number of houses are less and the success rate is less.
“So this kind of signals how the market is doing.”
Auction veterans say there’s an art to landing the winning bid
Cate Bakos’s job is all about riding the wave of an auction to land the winning bid.
The president of the Real Estate Buyers Agents Association of Australia says it’s not uncommon for clients from the UK or US to find the concept of an Australian auction “quite terrifying”.
She’s also seen competing bidders crumble under the pressure.
“I’ve seen people get carried away, and then immediately have buyer’s remorse and be unprepared to sign a contract,” she says.
She says careful research is the best way to protect against a “deer in the headlights” situation at auction.
“To conduct all of your due diligence very thoroughly, and to do your pricing analysis in particular, is really important,” she says.
“Because you’ll hear cries of auction underquoting, and bad agent behaviour all around the nation, and you can eliminate that being a risk to you if you’ve done your homework thoroughly.”
For all its drama, Ms Bakos reckons the transparency of an auction to sell a home can’t be beaten.
“There’s no games being played or underhanded tactics or bluffing, because you can stand out in a public auction and see your opponents,” she says.
“It’s unlike a blind-bid situation where you might submit an offer and then find out after the event that the next-highest bid was $50,000 under yours.
“An auction gives you a chance to pip someone at the post and to pay what feels to you like a fair price.”
Source : ABCNews