Purchasing property in Australia – the winner’s curse and how to avoid it (Ep.94)

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In this week’s episode, Dave, Cate and Pete take you through:

  1. What is the winner’s curse? Where there’s competition to win an asset that is in limited supply, (eg: a house), there can only be one winner. Typically, the person who wins the property pays the highest price. The winner’s curse can manifest in concern and fear about overpaying.
  2. Why are we prone to the winner’s curse? It stems from our need for social proof to affirm that we’ve made a good decision and if we feel like we did not do enough research and analysis to accurately understand the market and/or our own financial position and goals. The fact that a buyer is willing to pay the highest affirms that no one else was willing to pay a price at that magnitude. This can make a buyer second guess all of the planning and preparation that went in to their decision in the first place.
  3. When is it most likely to strike? The trio share the scenarios where the winner’s curse is most likely to creep up on the successful purchaser.
  4. How to combat the winner’s curse. Planning and preparation is a sure-fire way to avoid feeling concern that you’ve overpaid. The Property Planner and Buyer share their top tips on how to prepare so that you can be confident in your evaluation of the property’s value and when to stretch beyond this price. You also need to understand your financial position, short and long-term goals clearly to buy confidently without regret. But if you can’t help feeling the winner’s curse, it’s important to remember that if you’re in it for the long-haul, the property market is forgiving if the property is held for many years to come. 
  5. The other side of the coin – loser’s regret. Loser’s regret is the feeling of having been too conservative with the limit that you ended at in your bidding or highest offer, when you fail to purchase the property. This is particularly pertinent when you find out the winning bid or the winning offer was both a reasonable market price to pay and affordable for YOU. 
  6. The under-bidder’s remorse. The trio share different examples of situations that cause people to fall short and end up as underbidders for a property and how buyers can put their best foot forward when preparing themselves for auction.
  7. Home buying – where emotions run high. The Property Buyer explains her auction price setting strategy when evaluating what is a suitable limit to adhere to for a property and the team discuss the when, where and why it is worth considering paying an emotional premium for a property.  
  8. And of course, our ‘gold nuggets’! 

Market insights

  1. NZ abolishes negative gearing. Any properties purchased after Saturday 27th of March will not attract tax deductibility on the interest portion of the repayments, while existing investment properties will have the negative gearing benefit phased out over the next 5 years. Although there is no silver bullet to cure housing affordability, could this be on the cards for Australia? Our trio discuss reasons it may or may not be a future policy setting of at least one party. As the Property Professor points out, investors share the task of providing shelter and this is something that our government is unable to deliver without the help of investors.
  2. Increased agent activity unlikely to abate the pace of the market. Although data shows an uptick in agent activity, which is a precursor to more stock on the market, it’s unlikely that this will take the heat out of the market. Corresponding data for buyer search activity is going through the roof and any new stock on the market is likely to be swallowed quickly.
  3. The bigger picture with property prices. Darwin and Perth property prices are growing strongly, exciting many property owners and prospective home buyers and investors. However, when looking at the data, it’s important to remember that although they’ve had strong growth recently (Darwin 16.7% and Perth 5%), prices are at the same level they were in 2009 and 2010. Data can be manipulated to support any intended view, so we advise you look beyond the superficial and news sound bites!


Show notes:

  • The winner’s curse 
  • When you’re fighting for something that is in limited supply, people will fight and there is only one winner. That winner, normally pays the highest price – particularly at auction. 
  • When a winning bidder takes the keys, they can feel a genuine concern and fear that they have overpaid.  
  • No one else was prepared to pay that price – why was I the one that paid the highest price? Did I miss something? 
  • Client’s missed out, had losers regret – two or three auctions, then they went really strong on the fourth one. One of them lost their job, she has a job now which is actually higher paying.  
  • How to combat the winner’s curse 
  • The property market moves on – if you’re in it for the long haul, the property market is forgiving.  
  • If something tilted our market tomorrow, everyone who’s bought in the last month would be feeling winner’s curse. 
  • Set your own parameters prior to any auction – if I purchase this property, I won’t feel the winner’s curse.  
  • When there’s less people to validate the price your paying – you can start to wonder why no one else is bidding on the property. 
  • Best and highest – because you’re flying blind, you’re not getting feedback from other bidders. What was the margin between me and the person no.2 – if it’s $50,000, you may have winner’s curse. 
  • Where no one else has bid – going to down-grade the budget, which is fair, but not fair if it’s a bit of a low-ball offer and the agent can’t make it work.  
  • Loser’s regret 
  • In essence – The feeling of having been too cheap in bidding and failing to win. 
  • Particularly if you have lost an object that you could have afforded – eg: when you learn what the winning bid/offer was 
  • If the bidders or negotiators know they are going to receive some feedback, they may anticipate regret.  
    • Auction feedback – how many people are bidding on the property, when people start dropping out of bidding, the value of the winning bid (whether yours or someone else’s) 
    • Negotiation feedback – when an offer is accepted/declined, what is the value of other offers, what was the winning offer? 
  • Intuitively, if the bidders anticipate that they are going to feel winner regret, they will shade their bids and potentially suffer the loser’s regret if they lose.  
  • In contrast, if their anticipation is loser regret, they will overbid – and potentially suffer the winner’s curse if they win. 
  • How can you avoid loser’s regret 
  • They can be overcome by planning and preparation – your financial circumstances, lifestyle and emotional drivers and future goals. That allows you to land and feel comfortable with the price point – you know the market and you know what you’re willing to pay.  
  • Loser’s regret strikes far more often than the winner’s curse.  
  • Home buying – emotive values 
  • There are so many elements that people will put a high price on. 
  • 3 prices – market value, what they are willing to pay, walk-away price if under heavy competition. 
  • A moving market is a reasonable reason to have that higher level 
  • If you don’t stretch now, you may end up paying that anyway in 2 months for a worse asset 
  • Underbidders remorse 
  • People without a plan – they’re more likely to have a sense of remorse afterwards. They could have blindly followed the listing price guide and realised afterwards it’s not based on the reserve or expected outcome. 
  • Didn’t set a stretch, the auction happens fast and they didn’t have a time to chat and agree on it. 
  • If you lose your mojo, intimidated or rattled.  
  • Go to auctions – keep your hands in your pockets if you’re not interested. But go to auctions and work out what is happening.  
  • Personal examples 
  • Time almost heals all wounds in real estate – if you’re in it for the long-term, it doesn’t matter so much if you’ve overpaid in the beginning. 
  • Listening to the wrong person. 
  • Your own financial situation, value of the property and the emotional drivers that are the hardest to understand.  
  • Modelling contrasting scenarios – so people don’t have this feeling about the financial outcomes.  

David Johnston- The Property Planner’s Golden nugget: Know your existing financial, lifestyle and emotional drivers and future financial and personal goals and plans. Then decide any emotional premium you are willing to pay if it is a home because your affordability or Money Goals exceeds your market value estimate. Know the market – Track comparable sales. Then, decide your price and stick to it!

Cate Bakos – The Property Buyer’s Golden nugget: If you want to avoid missing a great opportunity, you have to stay in touch with people. If you’re confident you’ve picked a good property and you know it’s value. The price that it will land at will be determined by the competition. Stay in touch with the agents and don’t hesitate to ask them how something is tracking.

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