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“Limited inventory and more buyers in the market are likely to be the cause of further price increases,” she said. “Once interest rates went up, people became cautious.”
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These data only count sellers who received an offer but rejected it and continued the auction.
They did not measure the outcomes for sellers who accepted early offers, nor did they model how high those sellers might have gotten if they had decided to go to auction. If someone accepts an offer because it was too high, there is no guarantee that other potential buyers will push their bids up to that level on auction day.
RMIT senior lecturer in economics Dr Peyman Khezr warned that every house was a heterogeneous entity, so it was difficult to conclude that an auction was a better option than a private sale based on price premium alone. He said the best sales process depended on the house and market conditions.
“(Auctions) are good for sellers because in an open environment, buyers are competing against each other and usually these auctions result in the highest bidder winning the property, which in turn sells the property for the highest price,” he said.
“Auctions have disadvantages when the market isn’t hot enough to attract enough buyers, or the nature of the property means it will never attract enough buyers.”
He said herd behaviour could mean buyers update their valuations if they see other buyers are willing to pay more, but previous research has found properties that don’t sell at auction are ultimately priced 2 to 3 per cent lower.
Khezr said a previous study he conducted found that sellers are often the winners in pre-auction sales because they know what price they can expect if the auction goes ahead. For example, a seller expecting $1 million might accept an early offer of $1.1 million and cancel the auction rather than risk going ahead with the sale.
More buyers can improve the outcome. For example, suppose there are only two buyers, one willing to pay $1 million and the other willing to pay $1.1 million.
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In private negotiations, the second buyer will pay $1.1 million because they don’t know their opponent’s bid. At the auction, they will pay only slightly more than their opponent’s $1 million bid, leaving them with less than $100,000.
But if there are many buyers competing, there’s a good chance someone has a budget of $1.09 million, which would push the price almost sky-high, he said.
Buyers considering whether to make an early offer should independently assess the property’s value based on comparable sales rather than relying on a broker’s price guide, said Rich Harvey, a buyer’s agent. Alternatively, hire an appraiser or a buyer’s agent.
This may depend on local market conditions, how many other potential buyers are interested, and whether the seller is committed to the auction or concerned about the possibility of it passing in.
“Auctions are a very emotional process – it’s a real high-pressure environment,” said the CEO of propertybuyer.com.au.
“If you’re going to make a pre-auction offer, you have to beat all the other offers – you have to be prepared to pay a pretty decent premium.
“Sometimes I tell clients it’s not worth making an offer before the auction. It just drives up the reserve price.”
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