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

The 'big four' auction houses do not exert similar effects on auction outcomes. Auctioning house C has a positive impact on the probability of success, and is significant at the 10% level. Turnout (TURN) is significant at the 1% level. This is the first empirical support for theoretical expectations, and is a particularly important result when coupled with the findings of prior work that showed a positive association between turnout and the price of auctioned land (Ching and Fu, 2003).

The results also show that semi-detached and detached houses have a lower probability of sale. This could be attributed to the higher prices of these properties as well, as greater atypicality associated with larger properties. Viewed differently, the empirical evidence shows that more homogenous properties (apartments and condominiums) are more likely to be auctioned, a result consistent with the prediction in Mayer (1998). Properties in the central region have a higher probability of being sold relative to those in other regions, though only weakly significant at the 10% level.

Level of reserve price (LRP) is positive but not significant. The positive coefficient means that the larger the difference between the market value and the opening bid (implying a lower reserve price relative to market value), the higher the likelihood of a successful auction. The tenure status of the property (TEN) and vacant possession (VP) are not significantly associated with the probability of success, although the signs are in the expected direction. One possible explanation is that tenure and possession differences may be completely captured in prices paid.

An LM test for heteroscedasticity was conducted by conditioning the error term on property characteristics (TYPE, TEN and VP). No heteroscedasticity was detected.

Marginal Effects

Exhibit 4 shows the marginal effects of changes in the level of the explanatory variables. It shows the marginal effects of all variable evaluated at their means (with standard errors and significance levels). The probability of a sale increases marginally for every unit change in the level of reserve price when evaluated at the mean LRP. In contrast, the probability of a sale increases by 0.07% for every unit change in turnout, evaluated at the mean turnout of 190. Given the substantial variation in turnout (minimum of 30, maximum of 450), the result strongly supports the idea that turnout is critical to success.

Because the auction house variables (A, B, C and D) are dummy variables, the marginal effects reported in Exhibit 4 are not meaningful. To better evaluate the effect of the auction house on the probability of sale, the marginal effects were recomputed for each auction house separately by assigning a value of 1 to the auction house of interest and zero to the rest. The results are reported in Exhibit 5. It is clear that auction houses A and C have the higher marginal impact. A property that is auctioned by auction house C has more than a 13% greater chance of being sold than if the property is not with house C. The next highest marginal effect is 11 % for auction house A. The marginal effects for auction houses B and D are again insignificant.