Why auction in a declining market?

In some areas, this reduction in auction volume is as much as 30 per cent. This partly reflects a reduced amount of stock coming to market but also partly reflects the changed market conditions. 

Something we often notice in softer markets is that some practitioners tend to gravitate back toward what they perceive as the safety of fixed-price selling. Interestingly though, the top performers, the skilled and seasoned exponents of the auction process, actually double down on listing everything for auction because they understand the essential leverage the auction process creates for them and they know how to utilise the process to achieve swifter and better results even in softer market conditions.  

In a declining market, auctions serve a vital purpose by creating a timed imperative for interested buyers to engage with a property. In essence, they create a reason for buyers to act. So in this new and changed market, the purpose of booking an auction is not necessarily just about ending up in the backyard with 10 registered bidders fighting it out; it is about giving buyers a reason to engage and act in a timely manner to cause a successful sale. 

The buyer in a declining market is very different to the buyer in a hot market.

In a hot market, buyers tend to be so motivated to secure something that they are clambering over each other in order to buy. They have to in order to secure something because the market is so competitive. They also know the market is going up, so they act with confidence around the price, knowing the property will be worth more than what they are paying today in the coming months and years. So the hot market buyer is a confident, motivated buyer.  

In a cooling market, the opposite is true. The buyer in a cooling market is aware they are not competing so much, and they tend to be gripped with caution and fear because they sense the property may be worth less in the coming months and years as the market falls. They are aware the market is going down, so they reason that if they don’t buy this property today, then they will buy something else in a month or two’s time and probably for cheaper. That is their mentality. They are far less committed and far less confident. They will only do a deal if the price is right.  

The result is that in a declining market, it is far more challenging to get buyers to engage, make offers, and actually do the things they need to do to buy.  

In an auction campaign, an interested buyer is fully aware that as the auction date looms, they really do need to act if they are interested in buying this particular home. Thus the timed nature of an auction campaign creates impetus to engage. On many auction properties, it is actually the looming auction date, or indeed auction day itself arriving, that finally forces an interested party to come to the negotiating table.

Of course, an enduring benefit of auctions in both hot and cold markets is that there is no better leverage than competition. The social proof of seeing others interested at the same level is the most powerful tonic to breed confidence around price amongst buyers in all conditions. This is particularly valuable in cooler markets where buyers are otherwise very tentative on price. 

So if you can achieve competition on a property in a cooler market, then this is the most likely recipe to give your buyers the confidence to act strongly on price. An auction makes that competition clearly visible to the buyer. 

The auction process also offers flexibility by offering a variety of levers to pull to create action from buyers, such as adding, removing or changing a price guide, bringing an auction date forward or pushing it back, instigating competitive pre-auction offers from multiple parties where an offer is received that might cause the property to sell prior etc., thus offering a more nimble process allowing the agent to pivot when needed on price, timing and strategy, without damaging price perception around the property. 

In a declining market, some properties will sell on auction day; some will not. That’s a reality. What we often observe, though, is that where a property does not sell on the auction floor, we quite frequently see offers and interest being forthcoming in the hours or days immediately after the auction. So even passed-in auctions are causing activity, creating engagement and bringing campaigns to a head. A passed-in auction often causes rapid price alignment between buyers and sellers. 

The key is to get past thinking that the selling on the auction floor is necessarily the endgame. Getting the property sold in a timely manner for the best price possible is the endgame. Whether that happens on the floor, prior or post, is irrelevant. Selling by auction is about putting a process in place that causes a successful sale in the most timely manner while providing maximum flexibility and leverage. 

Clarence White is an auctioneer with Menck White Auctioneers.