With so much property market data available to us, the Reserve Bank of Australia has reported another interesting way of determining future property prices.
And it’s not one that you’re likely to have thought about.
In the Research Discussion Paper “Predicting Dwelling Prices with Consideration of the Sales Mechanism” authors David Genesove and James Hansen explored the interplay between auctions, private treaties and house prices.
They used sophisticated statistical analysis that I certainly couldn’t understand, but I was fascinated by the conclusion:
Auction prices a good indicator of what’s really going on
You see…they found that auction prices “can be used to predict both private-treaty and average dwelling prices”
By including auction prices in their statistical models they could reduce the forecasting error for Melbourne and Sydney house prices by 10 per cent and 18 per cent, respectively.
However private sale (private-treaty) prices offer no such insight into future prices.
Now this is even more interesting considering auctions only accounted for about 12 per cent of Sydney property sales and 17 per cent of Melbourne sales between 1993 and 2012.
Other states were excluded form this analysis because auctions numbers were too low there.
So what does this mean to an average property investor?
While all this is interesting, when you examine the complicated hedonic process the RBA used, unfortunately doing these types of sums is beyond the scope of you and me.
It’s not as simple as looking at the weekend auction results.
The RBA also examined monthly changes in household characteristics such as the number of bedrooms and bathrooms, size of the dwelling and its postcode to model the average auction price.
At the same time we know that reported auction results are misleading.
Here’s the bottom line…
For me this analysis shows the transparency of auctions and that in a sellers’ market like we’re currently experiencing, this should be the preferred method of sale for most vendors.
That’s because the final sale price at an auction typically incorporate feedback from every potential buyer who choses to make a bid at the auction and because buyers dynamically alter their perception of the value of the property based on the bidding of other people.
However in a private-treaty sale, where the information only available comes from the seller and one buyer, the final price may not reflect the “fair market value” of the property.
In other words an auction places a relatively higher weight on buyers’ valuations. Beyond setting the reserve, the seller is largely irrelevant to the final price.
By comparison, for a private-treaty it is the relative bargaining strength of the buyer and seller that determines the sale price.
By virtue of better reflecting available information, an auction is more likely to result in a price that reflects the prevailing fair value of the property.
An auction is also less likely to be affected — positively or negatively — by temporary or transitory factors that may affect the price in a private treaty.
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