05 Apr Should auctions be controlled more?
Auction continue to grow as a method of sale but there are changes on the horizon and Dr Andrew Wilson details the changes being foreshadowed as a result of many complains about price ranging.
Kevin: There’s been a lot of talk about what’s going to happen with auctions, whether they should be controlled more, and you probably would be aware of what happened in Queensland last year with some legislation of governing how auctions should be handled by agents. It seems that something may also be happening in New South Wales. I wonder what your feeling is about that. Let us know anytime, of course, through the show. Just do it through the comments section.
I’m going to get his opinion on this, Dr. Andrew Wilson, Chief Economist with the Domain Group. I know you watch these auction results very carefully and you’re a student of auction. Tell me briefly what the government are looking at doing, why they’re doing it, and what impact you think it will have.
Andrew: The New South Wales government, in line with the Queensland government, has been concerned about underquoting by agents in terms of auction markets. The price guides are significantly less than the prices that are realized at auction.
But look, this is just a clear product of a very strong market. It’s very difficult when you’re getting price rises generally of up to 15% in the capital market city, and in some cases, Sydney suburbs have risen by over 30% annualized. It’s very difficult when you’ve got that level of competition amongst buyers that are pushing prices up 10%, 20%, 30% above reserves, to be able to give an accurate estimate in terms of a price guide.
We can’t really control these things, this is just a really strong market, and the whole purpose of an auction for a seller is to create a market environment of uncertainty. The buyers are there to fight it out, and the highest price wins.
If you’re going to have to start putting out price guides that have some sense of accuracy to them, you might as well be going up private sale and sellers might as well just put a very high price on their reserves – in other words, not a minimum, but a maximum – and then negotiate downwards rather than push prices upwards.
It’s a product of very strong market activity. I know there’s a lot of disappointed buyers out there who do go to an auction with an expectation that it will bring a particular price and then it’s $100,000, $200,000 more, and there is disappointment in that scenario, but it’s just a product of a hot market.
Most owner-occupiers, most buyers are sellers and sellers are buyers, so they don’t want to interfere in the process of maximizing the price outcomes for their property, and there’s no doubt that when there are more buyers than sellers that auctions are the way to maximize your price outcome is you’re a homeowner.
Kevin: Yes, this underlines the problem, doesn’t it? They’re trying to outlaw lowballing or giving buyers an indication about the price that the property may actually sell for when in fact it sells for a lot more. Surely, that reinforces what happened in Queensland where price ranges were outlawed for that reason.
Andrew: That’s right, Kevin, and as I said, all it does is it changes from that auction marketing environment to one of a private sale environment. If you’re starting to actually have to promote what you think the price will be, obviously then the seller is under pressure to nominate a price, and so is the agent. It’s very difficult for agents because they, too, are in that position where prices growth is extraordinarily strong and it’s very hard to monitor the rate of growth.
Look, buyers do have a lot of information options at their fingertips. There’s a lot of data that’s provided for free now that indicates growth in prices, recent prices in neighborhoods and particular properties that they can use as a guide, but it is a product of a hot market. We would be talking the reverse, of course, if it was a cold market. We would be worried about over-quoting for properties to try to get vendors to sell.
Kevin: Buyers simply wouldn’t turn up if you are over-quoting, would they?
Andrew: That’s right. The whole purpose of the auction is to create a free market environment where the buyer sets the price. The point is that the seller doesn’t have to accept the price, and it’s the imperfect acknowledge from the point of view of the buyer that makes them bid competitively, because if they knew what the price was, they would just all start negotiating downwards from the headline price.
I understand there are a lot of disappointed buyers out there that miss out on auctions. It is that underlying imbalance between supply and demand, but that’s just the nature of the game, and we just need more supply, particularly in that Sydney market, to start balancing out price growth.
Kevin: John McGrath, of course, spoke out quite strongly against what the moves were in Queensland. I wonder what his reaction is to what’s happening in New South Wales. Have you heard at all?
Andrew: No, I haven’t. In Sydney, the proportion of auctions for overall sales is now rising up to around about one in four, and why wouldn’t it be given how strong the market is and how you can optimize your outcomes in terms of price in an auction environment in a strong market?
Melbourne is “Auction Central” for capital city auctions. It has over 30% of its sales from auctions. Sydney is now pushing up that way because of the strong competition for property. Sellers indicate that by preferring to go to auction to maximize their outcomes.
Of course, it’s better for the agent in the sense that they too can let the market decide, and that’s what an auction is all about: let the market decide on the day what the price is. There are no guarantees for sellers, either, and they have to conduct a four- to six-week campaign in that uncertain environment of knowing of whether they will get the sale they want at the end of the day.
Kevin: Watch this space, that’s all I can say. We’ll get comment from John McGrath a little bit later in this show, as well. He’ll put his view forward, as well.
Dr. Andrew Wilson, Chief Economist with the Domain Group. Thank you so much again for your time.
Andrew: My pleasure, Kevin.