The Impact of Auctions on Residential Sale Prices : Australian Evidence

Article excerpt

Abstract

This study re-examines the variation in selling prices between the auction and private treaty method of sales. Using sales data from five major Australian capital cities over a four year period, we estimate a hedonic pricing model. Results indicate that for house sales, auctions lead to greater selling prices across all cities examined. However, results for unit sales reveal that this auction premium is only evident in two cities where auctions are less prevalent. Further analysis reveals that self-selection (where a particular method of sale is selected to maximise the selling price) is evident across the sample. After controlling for this self-selection bias using a two-stage model, houses sold via auction generally command a higher price. This suggests that the auction method of selling provides a price premium over the private treaty method of sale.

Keywords: Residential real estate; Auctions; Private treaty.

JEL Classification: D44, G10, G14.

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1. Introduction

The efficiency of the market for residential real estate is studied widely, mostly drawing on US data. Much of this work concludes that real-estate markets function with suboptimal efficiency (e.g. Case & Shiller 1989, 1990; Ashenfelter & Genesove 1992; Mayer 1998). However, this work is generally unable to fully rule out market efficiency, but instead has pointed to the fact that optimal market efficiency is unlikely, given the large transaction costs in the real-estate market when compared with, for example, those that pertain in equities markets. Another reason for these findings can be attributed to market design. Differences in market design are studied extensively across various types of markets, such as equities, derivatives and foreign exchange. In relation to real-estate markets, the comparison focuses on prices generated at auctions and private negotiations. Much of this work is based on data derived from the US, and it has produced inconsistent results. Several studies find that prices paid at auction tend to be higher, and in one study by Ashenfelter and Genesove (1992), the auction premium is as high as 13%. On the other hand, several studies find that auctions result in lower average property prices (e.g. Mayer 1998).

Previous work is of limited application to the Australian market, even though the structure of the Australian market (especially in major metropolitan areas) is much more conducive to this type of research. In US markets, auctions are used as a last resort, usually when owners are under financial duress and are thus required to sell (Vanderporten 1992); hence, the results of such studies suffer from external validity biases. This contrasts with markets in major Australian cities, in which auctions are seen as a viable method for selling residential property. While private negotiations provide potential buyers time to consider and theoretically have an infinite time period, auctions provide several other benefits. The auction process promotes competitive bidding, ultimately removing any price barriers, which is particularly beneficial for unusual or desirable properties which are difficult to price. A set date of sale also encourages potential buyers to act quickly, possibly reducing the time to sell a property.

There are two studies based on Australian and New Zealand markets (Lusht 1996; Dotzour, Moorhead and Winkler 1998)1. Lusht (1996) examines selling prices for 163 properties sold via auction versus 58 properties sold via private treaty in Melbourne, Australia, over the period January 1988 through March 1989. A probit analysis reveals that the choice of marketing depends on the age, condition and date the property is sold, with older and more run-down properties being increasingly likely to be sold via private treaty. After controlling for several qualitative characteristics of the properties sold (using a hedonic pricing model), Lusht (1996) finds that auction sales command a premium of AUD $19,326 (approximately 8%). …