Could tighter auction rules change the way Australian homes are sold?

Beyond the headlines of falling house prices lies a less explored question: how do the rules governing property transactions influence the prices we ultimately observe?

In financial economics, this is known as market microstructure – how markets are organised, how buyers and sellers interact, and how information shapes trading behaviour and price discovery.

Consider the share market. Investors observe bids and offers, revealing prices at which participants are willing to transact. As orders arrive, prices adjust continuously, incorporating new information about supply and demand.

Housing markets operate differently.

Properties are heterogeneous, transactions are infrequent, and buyers cannot observe a continuous order book. Unlike shares, the same property cannot trade repeatedly throughout the day. A dwelling may change hands only once every several years, making comparable sales imperfect indicators of current value.

Auctions partially overcome this information problem. They bring competing buyers together, reveal willingness to pay through successive bids and establish prices through competition.

This is particularly important in Melbourne, where auctions have long been embedded in the city's property-selling culture.

But what happens when we change the rules governing that competition?

Transparency comes with trade-offs

Victoria's new auction regulations commenced in October, with reserve-price disclosure requirements applying to auctions held from 16 October. Sellers must publish their reserve at least seven days beforehand.

The objective is understandable: reduce underquoting, improve transparency and prevent buyers wasting resources pursuing properties they cannot afford.

Consumer advocates have long raised concerns about underquoting and the costs imposed on unsuccessful buyers. The Real Estate Institute of Victoria, however, has questioned the practical implications of the reforms, particularly restrictions surrounding revisions to published reserve prices.

Under the new framework, changing a published reserve before auction restarts the seven-day disclosure period, potentially requiring postponement.

Auctions are not simply the conclusion of a marketing campaign. They are part of an evolving information-discovery process. Sellers learn about demand through inspections and enquiries, while buyers update valuations through competing bids.

Requiring sellers to commit publicly to a reserve before this process concludes may introduce rigidity precisely when flexibility is valuable.

Yet disclosure could also encourage participation by providing buyers with greater confidence. Alternatively, it could anchor bidding around the published reserve or discourage participation when expectations appear unrealistic.

Neither outcome is inevitable.

Will auctions lose their appeal?

In earlier research, I examined residential transactions across five Australian capital cities. We found that houses sold through auctions generally achieved higher prices than comparable private treaty transactions. Competitive bidding can generate a premium for sellers, although this advantage varies across property types.

This raises an important question: if additional disclosure requirements make auctions less flexible, will sellers increasingly favour private treaty negotiations?

Such a shift matters beyond individual transactions. Private treaty sales involve bilateral negotiations, with competing offers often invisible to other buyers. Auctions make bidding behaviour observable, generating valuable information about market demand.

Paradoxically, a reform designed to improve transparency could encourage transactions towards a less transparent selling mechanism.

What the data already tell us

An important consideration in evaluating these reforms is that auction activity was already declining before their introduction.

Cotality data show that auctions represented approximately 38 per cent of new Melbourne listings in the first three October observations, down from 50 per cent over the corresponding period last year. Excluding pandemic-disrupted 2020, this is the lowest comparable October reading since at least 2018.

But this trend is not unique to Melbourne. Sydney’s auction share also declined, from approximately 48 per cent to 37 per cent, suggesting that broader market conditions are already influencing sellers’ choice of selling method.

The broader housing downturn adds another complication. Cotality reports that combined capital-city dwelling values have declined 8.1 per cent over seven months since the budget, the fastest comparable fall in forty years. Melbourne values are 7.6 per cent lower than a year ago, according to Cotality.

In declining markets, sellers and buyers continually revise their expectations, making price discovery particularly challenging.

The real test lies ahead

The question is not whether transparency is desirable, but whether these particular rules improve market outcomes.

Greater disclosure may attract informed buyers, reduce wasted expenditure and strengthen competition. Alternatively, restrictions on reserve-price revisions may discourage auctions or encourage private treaty sales.

For now, the data tell us something important about the market entering the reforms, but not yet their consequences.