Last week Mr Maguire staged a How to Bid and Buy at Auctions seminar for more than 130 house hunters, providing tips on the auction process designed to make bidders more competitive and help blow rivals out of the water.
Auckland property sales are dominated by auctions, with nearly half the region's May transactions done under the hammer.
Mr Maguire said competition for scarce property listings was cut-throat and serious buyers needed to turn up mentally focused and ready to perform...
Mr Maguire said it was important to have a financial plan and know your limit.
Buyers should jot down a running list of price thresholds - starting from the likely opening bid (usually around CV) and ending with the final price limit they are prepared to pay.
"You've got to stop when you hit your limit."
In the second article, Lane Nichols reported on a subsequent auction, and quoted one bidder:
Ms Flavell-Neville agrees the auction process pits buyers against each other, with the potential to induce reckless spending.
"You want to be the winner. I think I would have kept going for a bit longer just to win. But you have to have a hard limit.
"From what we've seen it seems the less people who are bidding the better because they just egg each other on."The standard English auction really is a suckers' game. They're great for sellers, but not so much for buyers. Why? Because of the winner's curse.
Consider a group of potential buyers for a particular house. Rational buyers with the same preferences would all have the same valuations (or willingness-to-pay) for the house. However, not all potential buyers have the same preferences, and the potential buyers may make random errors in determining their valuations for the house, so all of the potential buyers will have different willingness-to-pay for the house. For buyers with similar preferences, these differences in willingness-to-pay arise randomly - some will overestimate the quality (and value) of the house, and some will underestimate. Probably, if we believe in the wisdom of crowds, the 'true' value of the house will be close to the average willingness-to-pay of all of the potential buyers.
Now take this group of potential buyers and subject them to an English auction for the house. In the English auction format, bids start low and each subsequent bid increases the price that the house would be sold for. The buyers who have underestimated the quality (and value) of the house will quickly drop out of the auction, because the bids will soon exceed their willingness-to-pay for the house. However, the buyers who have overestimated the quality (and value) of the house have an incentive to remain in the auction longer, since higher prices will remain below their willingness-to-pay. The chances are high that, if there are enough potential buyers bidding in the auction, the eventual winner will have overestimated the quality (and value) of the house, and hence will pay too much for their house relative to its 'true' value, making them worse off. In other words, as the bidder above is quote, when there are more bidders it is more likely that some of them have overestimated the value of the house, and they will egg each other on to higher prices - not good for the eventual winner.
The solution is to add one further tip to Wayne Maguire's set of tips - in your list of price thresholds, your final price limit you should be prepared to pay should be somewhat less than the maximum you are willing to pay for the house (engaging in what is termed 'bid shading'). This would help ensure you aren't cursed as a winner.
One final important point - if (as stated in one of the articles) around half of Auckland houses are being sold at auction, and auctions are well-attended with many bidders, then many Auckland houses are being sold subject to the winner's curse. So their selling price of many houses will be above their 'true' value. That means that conventional measures of the value of Auckland housing, such as the median house price, will be based on house sales that include all of these 'cursed' homes. Thus the median house price will most likely tend to overstate the value of houses in Auckland.
That's not the end of this story though. Rational buyers have complete information about the house they are buying and will make their assessment of its value (and their willingness-to-pay) based solely on the house's characteristics (location, construction quality, number of bedrooms and bathrooms, land area, views, etc.). However, most of us are subject to an anchoring bias when valuing things we want to buy - they first price we see will tend to affect our valuation (and our willingness-to-pay). Chances are that potential house buyers will have the median house price for an area (or for Auckland as a whole) in mind when they evaluate their willingness-to-pay for houses they are looking at (it would be hard not to - the median house price is probably the most widely reported measure of housing value, and if you're a house hunter it would be hard to avoid seeing the median house price). So future buyers are likely anchoring their valuations on over-estimated median house prices. Some of them will further over-estimate, win the subsequent auction (with associated winner's curse), and boost the median house price further. Rinse and repeat. Could the winner's curse and subsequent anchoring of willingness-to-pay explain part of the housing price bubble in Auckland?
No comments:
Post a Comment