Soft house markets should lead to a spot of gavel gazing

“Are you done?”, shouts Gauteng-based auctioneer Gift Ngwenya. ”Three times I’ll call it”,  the auctioneer bellows before closing a sale after spirited bidding during Auction Alliance’s September residential property auction in Johannesburg.

Mr Ngwenya’s fiery chant is not enough to get the seller’s reserve price for a three bedroomed cluster in Northcliff Johannesburg, despite stiff bidding competition from 5 buyers including two foreigners. Despite our company’s recognised auction leadership status, Ngwenya struggled to get bidders to pay 60% of what this same property was selling for three years ago.

Auction Alliance led the auction industry last year, with 30% of all the country’s properties coming under its gavels. However, this year’s prices have been dropping steadily with a recent cool-off, showing that house prices are far from their bottom point. The September Residential Multiple auction, which was held at Auction Alliance’s state of the art new auction facility in Waverley Johannesburg, attracted a host of estate agents, property investors, bankers and even a well-known property economist,  who all came to see what the market is doing.

The auction revealed that property prices are falling quicker than many estate agents, banks or property owners would like to admit. If you want to see the real market in action, there is no better environment than an auction. We have been saying for years that auctions are the stock market of asset and property prices, and right now we are seeing markets weaken quickly.

The bidding lethargy is reflected in the September success rate, with the actual number of properties sold under the hammer averaging just 55% between August and September. “It was down from peaks of 80% seen early last year, and down on what the market sees as a ”healthy” confirmation rate of about 60%.

Up until October last year, our confirmation rates were sitting at around 70%, still relatively strong from the surge in sales and prices around the World Cup. It then hit the brakes, dropping sharply after the February 2011 concerns about interest rates, and has been consistently tracking down since as the market slows. Levels of business and investor confidence in South Africa have tumbled in September. As confidence in the residential property market falls, so does spending and investment, crushing the prospect of a quick recovery in house prices.

However, the auction mechanism is by no means uniform. Whilst areas like Hartebeespoort and Pretoria East are suffering very low confirmation rates, Johannesburg’s leafy northern suburbs are producing far better results. Although sellers are starting to have more realistic expectations, realising that prices have in fact dropped by at least 20% over the last 24 months, confirmation rates in suburbs like Sandton, Bedfordview, Hyde Park and Bryanston have been strong.

According to Craig Berman who joined the company from Pam Golding Properties two years ago, good auctioneers realise that auctions are the real deal, and despite estate agents often saying that they are giving properties away, they realise that the gavel never lies.  Berman maintains that more often than not, the buyers who come to the property on auction day are the ones who end up buying it, whether it’s on the day or afterwards and experience shows that  more sales are closed these days after the auction with intensive negotiations resulting in higher post auction confirmations.

Despite the decline, residential auctions remain extremely popular, particularly in Cape Town. In September, Auction Alliance conducted 112 residential auctions in the Western Cape compared with 97 in Gauteng, 61 in Kwazulu Natal, 27 in the Eastern Cape, 8 in the Northern Cape, 15 in the North West Province and 26 in Mpumalanga.

As prices have come down, and there is less demand for property, it’s a lot harder to get the reserve price at auction. Where there is a lack of confidence in the market, fewer people are likely to bid. However, good homes at market prices generate demand and that’s when the auction system shines.  The emotion and energy grab the buyer’s attention.

With prices all over the show right now, many people are seeing auctions as a true barometer of the market. Several estate agencies and smaller auctioneers are still trying the old model of talking the market up and saying that things will get better soon. Whilst I maintain that real estate remains the finest long term investment, anyone who believes that we are at the verge of a property upturn best come visit our auction sales.