Today’s Age carries a piece on under-quoting in real estate markets. It does the usual thing of showing some examples of houses that were quoted between $365K and $395K but sold for $448K; 12.5% more. (The supposedly worst example was a house quoted at $680K and selling for $908K.) Now this type of concern raises lots of questions. The first is what is a reasonable tolerance on quoting? After all, we just don’t know how often the quotes are over-statements and what the variance is likely to be. We have all been at house auctions where two bidders have killed each other for a house meaning that it sells at a value 10 or more percent higher than expectations.
The second issue is: so what? If you go to an auction because you think you are going to be able to afford a house and then cannot, what is the big deal? You have bid what you have bid and if the house sells for lots more it meant that there were at least two others who were willing to pay more. Your presence may have given them comfort that some people placed a lower value on the house but it is not a given that this benefits the sellers in some unscrupulous fashion. The best they get is a larger crowd but, in the end, the eventual buyer also knows that that crowd might have been there because of under-quoting.
What it comes down to it, houses actually selling for more than they were quoted is not the issue. If there is an issue of deception it only arises where the quote clearly misrepresents the seller’s willingness to sell and this leads people to waste their time. And the ACCC prosecuted that:
The national watchdog has taken one estate agent to court for underquoting since the new laws were introduced.
Gary Peer and Associates faced the Federal Court in a civil case, defending claims it had underquoted in advertisements for the sale of a Caulfield property in 2003. The property was passed in at auction for $781,000, but the agency had earlier advertised it at $600,000-plus and later at $650,000-plus.
Following a two-day trial in April last year, the agency was found to have engaged in misleading conduct in the way it advertised the property. It was ordered to pay the ACCC’s legal costs.
Mr Samuel said that under the act, the judge could not fine the company but only bring down a finding of guilt and impose an injunction to stop it from doing it again.
This is really the only solution to misleading conduct. The proposal by buyer’s advocates for reserve prices to be set and posted in advance would not serve anyone. One of the inefficiencies in markets arises when sellers are forced to state their willingness to sell. Asking them to do this will lead them to state too high a reservation price and this will drive more buyers away and reduce the efficiency of the market. A secret reservation price allows the sellers to modify it both upwards and downwards and to not commit to a price that might itself be unrealistic.
In the end, the real estate reforms did alot of good by getting rid of dummy bidding — which from an economics perspective was an unglorified form of collusion. The quoting system should not allow grave abuses but other than that will always have a degree of error and art.
As someone pointed out in a letter to The Age when these ‘reforms’ were introduced, deceptive auction practices (notably ‘dummy bidding’) were already illegal in Victoria. They were (and still are) the offence of ‘obtaining financial advantage by deception’, which carries a maximum 10 year sentence. (The offence is hedged by a requirement of ‘dishonesty’, but that has a very narrow definition in Victoria – basically that the offender believed that the financial advantage they got was something they were legally entitled to.) The letter to The Age made a good point: that the reforms really take the heat off the worst examples of agents and auctioneers by implying that their conduct is a regulatory failing, rather than a crime.
As Joshua correctly points out, the question to ask about (deceptive) over-quoting is what harm it causes. Wasting people’s time is anti-social, but it isn’t a financial advantage. Indeed, requiring accurate quoting by the seller harms to market. The best solution to people’s annoyance is to get accurate quotes from someone other than the seller’s agent. (As it happens, there was a nice article about hiring ‘buyer’s advisors’ in the Good Weekend.)
Sounds like a nice little business opportunity for someone like you (or me). Get hold of the REIV data base, run it through a neural net, and sell the best predictions that mathematics can generate. I am really surprised that someone has not already done it.
The value of a property isn’t just based on historical data. People pay an uneconomic premium for the condition of the building on a site, and that’s not recorded in the data.
Part of evaluating the condition of a building is a building inspection, which costs hundreds of dollars. There’s the financial harm. I’d suggest wasting people’s time is also a financial harm; there may have been other auctions to attend or properties to inspect.
And, for the love of all that is good in the world Joshua: a lot is two words. TWO WORDS!
Victorian law doesn’t currently prohibit wasting peoples’ money (or time.) It prohibits making money in certain bad ways, including deception and doing things with someone else’s property. So, if I make a deliberately false claim about how good Nintendo’s Wii will be, causing other people to buy it, I haven’t committed a crime. But if Nintendo does the same…
This may be bad law, of course, but that depends on who you think should be responsible when someone wastes their money. (The Commonwealth passed a law a few years ago making it a crime for anyone to cause the Commonwealth to waste its money. Watch out, Peter Costello!)
I’m with you Chris. I quite like dabbling in observing auction/house sales and have noticed striking and consistent differences between the quoting practices of different agents. Many agents appear to under-price by 5 – 10% (probably appropriate given that there is inherent uncertainty when a house goes to auction and the agent doesn’t want to actually turn off potentially buyers) while one in particular is consistently 15 – 20% (and in a couple of cases more like 30%) under. Frankly when I was buying a house I was sufficiently pissed off by the practices of this particular agent that I simply stopped attending those auctions. Bad for me? Possibly – but it also saved me a lot of time in investing energy and money investigating houses that later turned out to be out of my reach. Bad for the agent? Definitely.
[…] I introduced myself to the auctioneer. He had heard my name before but couldn’t work out where. I hadn’t bought or sold anything in that area. I decided not to tell him that the most likely place was in reading the Victorian government report supporting the outlawing of dummy bidding. I authored the economic advice. I also wrote a blog post on this topic. […]