Craig Pontey’s Blog – Auctions Stand The Test of Time

May 2, 2014 by Craig Pontey

In many parts of Sydney over the last few months we have seen a record number of auctions conducted, some of these auctions have been at record prices and some of these results have been reported as well above the reserve price.  The big increase in auctions has been driven by strong demand for property, with vendors naturally looking for the best price that the market is willing to pay.

Auctions are an open and competitive way of selling property. And in a competitive market buyers are free to pay whatever price they are able and willing to pay. Buyers will always have different financial circumstances and so there will always be under-bidders who are naturally disappointed that their bid was not the highest on the day. However when a property sells over the vendor’s reserve this is driven by demand at the auction in a free market environment. It also needs to be acknowledged that properties also sell for less than the reserve price, when by negotiation the vendor makes a choice to lower the price they are willing to accept for their property. In some cases this can happen during an auction or after when the parties settle on a price and sign a contract.

However to suggest that by not revealing the reserve, that the auction process is in someway ‘unfair’ or not transparent is I think more a result of some frustration among some potential buyers at a particular time when the market is very active. Markets are fundamentally driven by supply and demand, and as we know this fact applies to all markets and not only property. It is worth recalling that the word “auction” is derived from the Latin augeō which means “I increase” – the entire structure of an auction is to allow buyers to increase any offer so that they can secure what ever is being auctioned, and there are many examples where art, antiques, wine, tuna to name just a few items where record and unexpected prices have been paid at auction.

Auctions have a long history, having been recorded as early as 500 B.C. Following a military victory, Roman soldiers would often drive a spear into the ground around which the spoils of war were left, to be auctioned off so the “spoils of war”, were auctioned in the forum under the sign of the spear, with the proceeds of sale going towards the war effort. The Romans also used auctions to liquidate the assets of debtors whose property had been confiscated.

Now back to today we see that across the property market auctions grab the majority of headlines and really since the early 2000’s auctions have in some areas almost became street theatre, they can be exciting and even gave rise to TV reality programs like The Block and Hot Property.

Given the impact and popularity of auctions, and the fact that this is an area where emotions can be tested, how an auction is conducted is strictly governed by in our state NSW Fair Trading, bidders need to register, contracts have to be made available and an open marketing campaign is carried out to bring the property to market. However the vendor still has the right to set a reserve price, and while this is not a published figure, I think it is only reasonable that real estate agents are able to give a price guide. However in any final result the open market will set the final price and there is no reasonable way to ever stop that price going above reserve, buyers are free to make their own free judgment about what they are willing to pay.

I think it should also be acknowledged that it is today, thanks to the amount of detail published on the internet for potential bidders to do their own and very detailed research. There is no lack of market information available, and it is also possible to pay a small fee to get more detailed information.

In today’s residential property market auctions have long moved away from being associated with distress properties or high-end properties, auctions are now commonly used to market any type of property under very diverse circumstances. I think that this fact alone underlines how robust and open auctions are and further controls should be carefully considered so that we are not simply reacting to a particular market, like the one we have seen over the last 12 months.

We need to remind ourselves that auctions work because they are an open process, openly advertised, they create certainty because buyers can not be gazumped, people are free to inspect the property and register to bid and the final under the hammer price is set by the market and as such where there is strong demand prices may be higher than expected, but they can also be less. However prices are not inflated by an auction but rather auctions directly reflect market conditions and the price a buyer is willing to pay.

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