How Perception Affects House Prices: Evidence from Failed Auctions

UNIVERSITY OF TECHNOLOGY SYDNEY
Finance Department
Research Seminars in Finance

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Paper Title:  How Perception Affects House Prices: Evidence from Failed Auctions

Speaker: Kristle Romero Cortes, University of New South Wales

Time and Date: 12 – 1 pm, Wednesday 2 August 2023 (AEST)

Venue: Face-to-face seminar in room CB08.08.02, Level 8, Building 8, University of Technology Sydney, 14-28 Ultimo Rd, Ultimo, Sydney, Australia (Map of campus)

Abstract:  In Australian real estate markets, about a third of properties are sold at auction. We show that properties that fail auctions sell later for a 1.2% discount. This effect increases for properties failing multiple auctions and when no bids are made. Consistent with a causal channel, the effect holds using repeat sales with property-level fixed effects and when auction failure is instrumented by owners’ tendency to anchor on nearby better properties (thus setting reserve prices too high). Prices cluster just below salient round numbers, and the discount fades over time, inconsistent with our effects reflecting unobserved property characteristics. We test for several mechanisms and conclude that most of the pricing discount reflects stigma, which reduces potential buyers’ willingness to pay.

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