Real Estate Rant

In Melbourne (indeed, in most of Australia), property has traditionally been sold through auctions.  House auctions were rare when I lived in Canada, but they've been common in Australia in all my eleven years here.  They helped fuel a boom:  property values have always gone up since I moved here, and I reckon it's partly due to some bidding wars happening almost as soon as a good property hits the market.

The boom continued through the global financial crisis which saw house prices crash in the United States and the United Kingdom, with Melbourne house prices growing quickly though 2009 and the first half of 2010.  Things started slowing down halfway through last year.  More and more auctions occurred without any bidders present.    Or there were bidders, but the auction was passed in:  meaning the highest bid wasn't high enough to satisfy the seller.  The seller has a minimum number called a reserve, which needs to be surpassed at auction to avoid passing in.

My one and only experience with auctions is with the house which I am currently renting in Kensington.  The owners have decided to sell, and I was dying of curiosity to see the result.  So I came along to the Saturday afternoon auction.

Fortunately, one of my friends who has way more auction experiences than me was there.  He talked me through it.  The first thing he said was that he was surprised how few people there were.  Successful auctions have nearly one hundred people present.  This one had barely twenty people, and I recognised most of them as neighbours with a passing curiosity for either real estate in general or this house in particular.

The auction started.  "Can we start the bidding at $720,000?"  That sounded weird to me:  I knew they wanted $800,000 to $900,000 for this place (I was later told the reserve was $810,000).  Why would the auction start at such a ridiculously low price?

The auctioneer went on:  "The auction starts at $720,000.  Going up in increments of $10,000, the bidding starts at $720,000.  Any bids of $720,000?  How about $730,000?"  I must have missed something:  the price had already gone up and I didn't see or hear anyone bid.  "That's normal," says my friend.  "Nobody has bid yet."

The auctioneer goes on:  "$730,000?  Increments of $10k.  Does anybody want to bid $730k?  How about $740k?"  Now I know I've missed something, but my friend assures me a second time that nobody has bid.  The auctioneer pleads for $740,000, looks discouraged, goes inside (my home!) to discuss with the vendors, comes back after a few minutes and asks for $750,000!  After a few more pleads, he says the auction has passed in and thank you all very much everyone for coming.

Of course nobody bid!  A bid would have been like lifting up a big red flag with the word "sucker" on it.  A bid would have said "I want this place so badly that I'm willing to go through a bidding war when the place has just hit the market."  Any bid in the $700k - $800k range would have been greeted with "Oh, so you are interested enough to pay that sort of money for this place.  Let's see if we can bring you up to the even higher price which the owners really want."  And a negotiation process would have started.  I am sure auctions get great results for great houses, but they seem like a waste of time for crumbling little fixer-uppers like this one.

The funny part is that I suspect there were interested parties in the crowd.  Parties in a position to walk away from the deal, who figured they could sit tight and wait for the owner to sweat a bit.  When this house has been on the market for a while, an offer much lower than $810k will seem much sweeter to the sellers.

I never go to auctions:  I think they are a waste of time.  If there are bidders, they'll push the price up higher than it should be.  I bought a house in February 2011.  The same house had passed in at auction in November 2010, then stayed on the market for months (probably because the house's price was too high to begin with).  Unlike at an auction, I was in the driver's seat of the negotiation, and managed to get a bit of a bargain for it (by Melbourne standards).

Melbourne's crazy property market won't crash (at least, the chief economist where I work makes some pretty convincing arguments as to why it won't crash).  It will, however, slow down enough for people's salaries to catch up to it.  The fact that the buyers are fed up with these farcical auctions is definitely encouraging to those looking to buy.  Buyers who think they can barely afford a place of their own just need to be patient, look for fixer-uppers which have been on the market for a while and steer clear of auctions.