The Victorian Government has announced a groundbreaking new law requiring real estate agents to publish a property's reserve price at least seven days before auction or fixed-date sale, aiming to combat illegal underquoting.
While positioned as a solution to transparency in property sales, an RMIT expert cautions that this Australian-first legislation may not address the underlying issues or deliver the intended benefits to buyers and sellers.
Dr Peyman Khezr, Senior Lecturer, Economics, Finance and Marketing
"Publishing reserve prices may reduce some misleading advertising, but it will not stop homes selling at 10, 20 or 30 per cent above the advertised figure.
"Buyers may still feel 'underquoted', only now it will be a legal form of underquoting created by the new rules. Moreover, sellers bear the risk of being locked into the wrong number at the wrong time.
"If sellers are required to lock in a minimum price days before the auction, they lose the flexibility to respond to new information. In plain terms, it is like fixing your asking price for a very volatile asset before you know how many buyers are interested or what the market will look like on the day.
"Economically, it is also important to remember that a reserve price is a floor, not a forecast. It is the lowest price the owner is willing to accept, not an estimate of what the property will actually sell for. In competitive auctions, final prices routinely end up well above the reserve, which wouldn't resolve the underquoting problems.
"Housing markets are volatile: buyer sentiment, interest rates and comparable sales can shift quickly. In a market this uncertain, early commitment can be costly for people selling their homes.
"Currently, Victoria has some of the best underquoting laws in the country. Sellers must provide minimum and maximum price guides. A better solution would see the government working on the current legislation and mandating sellers to provide more accurate minimum and maximum prices. In most cases, the final price is between these two price guides."
Dr Peyman Khezr is a Senior Lecturer in the School of Economics, Finance and Marketing at RMIT and a member of RMIT's Behavioural Business Lab. He is an applied market designer with an interest in the housing market.
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