Auctions reveal the immediate truth and nothing but the truth

The price of property achieved at auctions is a real-time and true barometer of current market values, says Alliance Group CEO, Rael Levitt. He says inflated values bandied around in the traditional market are over-optimistic and present a false sense of buoyancy in the property market. “Although published house price indices suggest that average house prices are only around 10% lower than their late-2007 peak, auction results tell a different story.  Our carefully monitored stats show that for the first quarter of 2009 the market price for residential property might already be as much as some 20% to 30% down from its peak.” Given the difficult and rather capricious housing market conditions, it is possible then that house price indices presented by property economists are not reflecting true market prices.

Reasons for the discrepancy

“The reasons for the difference between these figures are the following:  Firstly, auctions are perhaps the only area of the market where activity has been increasing over the past year and secondly, auction data is immediate. Economists use historic data, normally from deeds office transfer, and these are out of necessity 3-6 months out of date. In a market that is dynamic and decelerating quickly, the immediacy is of great value,” explains Levitt.

Lastly, auction sales are a reliable indicator because they record finalised transactions. He says the average bank decline ratio has increased from 41.3 percent in 2008 to 61.2 percent in March 2009. For example, the price of property sold at an auction in March 2009 refers, quite simply, to non-suspensive prices attained in March 2009. In contrast the data from estate agents can often be misleading because the majority of transactions subject to financing, are not being concluded.

The bottom line is that house market values have fallen considerably more than that suggested, even by the most pessimistic of house price surveys.

Taking the ‘discount’ factor of auctions into consideration

“Admittedly, auctions tend to attract properties that owners are finding difficult to sell, are in a poor state of repair or are distressed. Therefore the prices of properties sold at auction tend to be lower than prices in the wider estate agent market. Our data reveals that there is thus a discount which must be taken into account when looking at auction values – this “auction discount” is a further 10% on current market values. Therefore, assuming that at previous sales properties that were sold through estate agents, the average decline in the price of property sold at auction will be greater than the decline in house prices in the wider market.  If, as our data reveals, the price of property sold at auction has fallen by almost 20% from the September 2007 peak in house prices, then a further 10% auction discount implies that the market clearing price in the wider market has fallen by around 30% to 40%.

Auctions increasing across the board

Over the last year, residential auctions in South Africa have grown dramatically in both value and number.  Levitt says, “We have sold over R7 billion worth of residential real estate (largely distressed houses) since July 2008. Up to the end of March we had taken 1500 houses and apartments to auction through our Residential Recovery Auction Programs alone. This continues to grow sharply. In May, we will be selling 750 properties (versus 40 in August last year). We expect to hit the 1 000 mark per month by July and see this continuing until the end of the year.”

Looking forward…

The dire outlook for the economy (despite lower interest rates) is good enough reason for property prices to fall further in the coming months. In time, sellers in the traditional market should become more willing to accept lower prices and in turn allow the finance-constrained and market-wary buyers to complete transactions. At this point, house price indices should begin to reflect the true market values.

Auctions becoming the preferred choice in all markets

The reason why auctions are fast becoming the preferred method of transaction in bull or bear markets, is that auctions much like the stock market are the point where supply and demand meet.  This is one of the reasons why sellers are increasingly turning to auctions when there is an immediate need to sell.  Levitt says, “Globally, sale by auctions are growing, and when the distress in the housing market ends, we firmly believe that auctions will remain the preferred choice of selling internationally.

Over the last four years auctions have become the preferred method of sale in the commercial property sector where major institutions, property funds, and sellers utilize them as means of sale. Recently, even the country’s largest commercial properties have been coming under the auctioneer’s gavel – unheard of five years ago. Commercial property auctions in South Africa are as large as private brokerage sales and it looks as if residential auctions too, will start competing with agencies as the preferred method of sale.