In Victoria and New South Wales, roughly one third of homes are sold at auction. Australia is one of very few countries in the world to regularly make use of auctions to sell homes - let alone "open outcry" auctions, where bidders compete with each other out loud in real time.
Auctions are known for this transparency, and there is a perception among many sellers they may get a higher price. But what about their risks - in particular, what happens if an auction fails?
Around the country, auction clearance rates have plunged to their lowest levels since the pandemic, continuing a downward trend that began as interest rates were pushed higher, even before major tax changes were announced in this year's federal budget.
For buyers and sellers alike, what can research tell us about the upsides and risks of going to auction? And what can a failed auction mean for a property's final selling price? Our recent research, based on 13 years of data from New South Wales and Victoria, showed just how much of a discount you might expect to see.
Australia's love affair with auctions
If an Australian shared a story about successfully buying a home at auction with someone from the United States, the likely response would be: "Why did you buy a foreclosed home?"
That's because in the US, auctions are primarily used as a last resort , such as when a lender takes control of a property.
So, how did Australia fall in love with auctions? Or, more specifically, Melbourne and Sydney, since these two capital cities dominate the auction market ?
Part of the reason is historical. In early Melbourne, for example, auctions were used not only to sell parcels of land but also many other goods such as livestock. It was convenient for buyers and sellers to meet in one place.
But the enduring popularity of auctions suggests Australians must like something about them.
Transparency and pricing
For buyers, a key reason is that the auction process adds transparency to a negotiation in which it is often hard to know what to believe. Buyers get clearer information about who is interested in a property and what they're willing to pay.
For sellers, auctions are also commonly thought of as a way to help achieve a higher price .
But our recent research shows the price premium from selling via auction (as opposed to via a private treaty sale ) may be more modest than is sometimes conveyed in the media.
More likely, an auction campaign is convenient, especially for real estate agents who avoid continuous back and forth between prospective buyers and the seller on price negotiation. Of course, that is, if all goes well.
What if an auction fails?
Our research found that from 2007 to 2019, between 10%-40% of auctions failed in a given month in New South Wales and Victoria. What happened to those properties?
For sellers, it wasn't good news. On average, properties that subsequently sold after failing at auction did so at a 1.3% discount, compared to the price our modelling estimates they'd have made if the seller had just chosen a private treaty in the first place.
Our findings suggest that when an auction fails, it creates stigma around a property. People become less interested in buying a property if they think other people believe something's wrong with it.
We found the price effect of this stigma stemming from a failed auction lasted roughly 10 months, after which the price recovered.
Despite the common perception that auctions are significantly better than private treaty, we found that factoring in this risk of failure, auctions on average only yielded a price premium of 0.3% relative to the same property selling via a private treaty.
In any event, when a property is "passed in", it provides a public dollar figure on what the sellers were hoping to achieve. This gives potential buyers a clear indication of where to start negotiating.
What about house prices?
Recent data from Domain suggests that an increasing number of sellers are withdrawing properties from auction as Australia's property market cools.
Alternatively, due to increasing mortgage costs, we may see some sellers make their reserve prices more realistic, or at least meet the market by negotiating with the highest bidder in the case of a failed auction.
But it's important to remember, falling auction clearance rates are only one marker of cooling demand in the housing market.
The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.
