Factors Influencing Auction Outcomes: Bidder Turnout, Auction Houses and Market Conditions

Journal of Real Estate Research, The, Apr-Jun 2005 by Ong, Seow E, Lusht, Kenneth, Mak, Chee Y

Abstract

This study provides new evidence on the outcomes of auctions of residential real estate, focusing on the effects of bidder turnout, pricing, market conditions and auction houses. The analysis of properties offered for sale by auction in Singapore from 1995 to 2000 shows that several variables are significant in explaining why an auction results in a sale. These variables include the state of the market, the timing of the auction (year), the number of bidders and the auction house. The findings indicate that the probability of a sale is higher for distress sales, for more homogenous properties and for those located in the central region. A sensitivity analysis is provided of how market conditions and the choice of auction house influence the probability of a sale.

Introduction

There is increasing interest in auctions as an alternative to private negotiations for marketing property. Since Vickrey (1961) opened the issue of whether pricing mechanisms matter, considerable effort has been put into the question of how auction revenues would rank under different sets of market expectations and valuations, and whether auctions and private negotiations can be expected to produce equal revenues. Reviews are found in McAfee and McMillan (1987) and Wilson (1992). Kagel (1995) reviews experimental research.

Recent research has focused on comparing revenues from different auction formats to revenues from private negotiations (Dotzour, Moorhead and Winkler, 1998; Mayer 1998; and Alien and Swisher, 2000). Less attention has been paid to the question of the determinants of auction success, defining success as a sale being made. DeBoer, Conrad and McNamara (1992) examine outcomes with a model limited to location and property-specific variables. Anglin (2003) and Mayer (1995) add changes in market conditions and Maher (1989) adds differences in intermediaries. Anglin provides an excellent theoretical treatment of how price and the probability of sale are related to market conditions. Dotzour, Moorhead and Winkler compare the probabilities of auction sales versus private sales for residential properties in Christchurch, New Zealand.

This study extends prior work by estimating a model that includes controls not only for locational and property characteristics, but also variables that measure the impact of "turnout"-a proxy for the number of bidders at an auction-and the impact of the auctioning house. Interestingly, though there is a large theoretical literature on the importance of the number of bidders (Vickey, 1961; Milgrom, 1979; and McAfee and McMillan, 1987), empirical evidence is thin. Burns (1985), in an experimental setting and counter to expectations, found that fewer bidders resulted in higher average prices. Saidi and Marsden (1992) found a positive correlation between average bid size and the number of bidders at auctions for outer-continental offshore oil leases. More recently, Chen, Liaw and Leung (2003) show that the number of shares tendered by bidders significantly affects the price of auctioned shares in Taiwan. Work on the effect of bidder turnout at real estate auctions is limited to Ching and Fu (2003), who measured the impact of competition on the share prices of companies bidding for land.

Using data from Singapore that includes all auctions of residential property from 1995:Q3 through 2000:Q1, this study finds that the state of the market (economy), the timing of the auction, the potential number of bidders and certain auctioning houses explain the probability of a successful auction. The findings also suggest an underlying trend toward more successful auctions, likely attributable to the increasing acceptance of auctions as a selling mechanism. A marginal effects analysis is included to obtain a clearer appreciation of how market conditions and the choice of auction house influence the probability of a sale.

The dominant auction format in Singapore is the English ascending bid auction. An auction has generally been regarded as the last resort method of disposal.1 The local sentiment towards auction is similar to that in the United States, where auctions are associated with distress properties-foreclosure or mortgagee sales (Asabere and Huffman, 1992). Distress sales are typically initiated by a mortgagee (bank/financial institution). There was a surge in auction sales following the Asian financial crisis of 1998-1999. Although the large majority of auctions remain mortgagee initiated, in the past few years there has been a discernible increase in owner auctions due to a diminution of the stigma associated with auctions. Nonetheless, the number of properties offered at auction is still low, reaching a high of approximately 3.5% of the total number of property transactions in 1998 and 1999.

The data for this study come from 1,654 residential properties that were offered at auction from 1995:Q3 through 2000:Q1. The sample includes auctions of apartments, condominiums, terrace, semi-detached and detached houses (see Exhibit 1). Transaction data were obtained from the ReaLink database, which is compiled by the Singapore Institute of Surveyors and Valuers (SISV).2 The private Residential Property Price Indexes (RPI) was obtained from the Urban Redevelopment Authority of Singapore (URA). The RPI was used to estimate the market value of each property at the time of auction.