Agenda Week 1: 16 September 2003

Agenda Week 1: 16 September 2003

Clare Branigan, Cal Muckley, Paul Ryan June 2012 A mental mask that induces a majority of subjects to produce a systematic error, Thaler (1988) It occurs in a competitive situation when a successful buyer finds that he has paid too much for a commodity

of uncertain value In an auction setting Bazerman & Samuelson (1983) show that 2 factors affect the incidence & magnitude of the Winners Curse The degree of uncertainty concerning the value of the item up for bid The number of competing bidders

Increasing either value will increase the range of value estimates & bids; thus the winning bidder will overestimate the true value of the commodity and overpay Common Value: To what extend can

these residential property auctions be described as Common Value? Goeree & Offerman (2002, 2003) note that in practice few auctions can be neatly categorized as either private or common value. In the context of residential property, the bidder will take into account both common price information (comparable house sales) and private information (e.g., specific styling preferences).

Under existing legislation (Data Protection Act) sales prices may not be publicly disclosed without the consent of both vendor & purchaser; the only exception being auction results. In the absence of a public register of prices, it has been almost impossible to value Irish property accurately.

Price movements, for example, have been expressed by reference to asking prices which can only ever indicate sellers aspirations. Public auction sales however are totally transparent Four years ago, houses on Shrewsbury Road were among the most expensive in Europe after 12 years of almost uninterrupted nationwide rises.

For example, in 2005, a 4,000 sq ft (372 sq m) house on Shrewsbury Road (Dublin 4) set an Irish record when a buyer paid more than 55m for a home with extensive land to the rear that remains undeveloped. Currently valued 8m (2012) Dublin Second-hand House Prices 800,000 700,000 600,000 500,000

400,000 300,000 200,000 100,000 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Source: Sherry Fitzgerald Research (2007) Data for all available auctions in Dublin area was collected between Sept 2004 and Nov 2005.

Date Total Sep-04 Oct-04 Nov-04 Dec-04 Feb-05 Mar-05 Apr-05 May-05 Jun-05 Jul-05 Sep-05 Oct-05

Nov-05 %Sold 146 176 72 11 44 141 146 204 178 39 168

143 97 1565 %Prior 37% 40% 32% 64% 50% 53% 42% 42% 44%

38% 36% 48% 45% 44% %After 3% 5% 3% 0% 2% 1% 2%

10% 6% 0% 8% 1% 2% 3% 17% 12% 18% 18% 25% 21%

25% 20% 20% 21% 15% 24% 13% 19% %Withdrawn 43% 43% 47% 18%

23% 25% 31% 28% 31% 41% 41% 27% 39% 34%

Observed over 200 auctions in this time period 105 were sold at auction, by an average of 40% over the guide price

Guide Price Sale Price Price announced on the market No. of Bidders Progression of Bids Previous Advertisement and Newspaper Editorials Characteristics of House Comparable Sales Agent

Self-Similar Properties; Used a hybrid Approach; Currently the properties are clustered by four dimensions Location No. of Bedrooms; Size (in sqft) Type of Property (apartment, semi- detached, Detached, Period)

1 950 1100 1200 1230 1240 2 1000 1150 1225

3 1050 1235 124 5 1255 1265 1250 1260 1270 1275 1272

We are interested in how the auction mechanism can affect the selling price. We are looking at the winning bid compared to an estimation of what the price should be.

Sunk Costs (Legal Fees, property survey, search costs) Endowment Affect Bidders view auction as a competition; wanted to win at any cost Easy lending policy by banks Three Bid Price Relatives

1 Natural Log of Selling price to Guide Price 2. Natural Log of Selling Price to average of self-similar properties 105 Auctions Average Bid % over Guide 80 70 60

50 40 30 20 10 0 1 2 3 4

5 No. of Bidders 6 7 #bidders Avr Bid 2

26 3 35 4 42 5 67

6 73 27 Belmont Ave, Donnybrook Apr 05 Guide 700,000 27 Belmont Ave, Donnybrook Apr 05 Guide 700,000 Sold 1.36 m,

4 bidders 94% over guide price 8 Temple Cresent, Blackrock May 05 Guide 650,000 8 Temple Cresent, Blackrock May 05 Guide 650,000 Sold, 1.3 m, 5 bidders

100% over guide March 05, 730,000 April 06 ? April 06 ?

Initial: 730,000 15% 109,000 Upgrades: 90,000 Total: 929,000 April 06 1.8m Sale Agreed Sept 2011 349,950

Price in 2007? 27 Ailesbury Rd 9m 35 Ailesbury Road, Dublin 4 July 2011 2.325m Summary

High Value purchase significant prices paid Typical buyers less sophisticated than experienced investors Transaction Costs are high Involves a great deal of risk and uncertainty

Property - Important Sector of Economy , in 2005 construction employment accounted for 12 % of total employment The Auction method contributed to huge price fluctuations and unrealistic valuations Houses in South Dublin had 8-10 times increase in value compared to Dublin average of 4 times (1995-2005) Also influenced house valuations in rest of Dublin and

nearby counties Previous studies on property auctions are limited Percentage of Auctions increased each year by 25% from 2002 By 2006 - 1,400 houses were auctioned, the majority of second-hand residential homes in South Dublin

Transparency in Sales Results Sales Prices should be made available in a Public Registry Changes to Guide Prices Changes to Auction Policy [email protected]

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