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What is the hidden cost of a failed property auction?

UNSW Sydney

New research from UNSW Business School finds that selling a home at auction carries more financial risk than most sellers realise

The auction is one of the most visible rituals in Australian property. Bidders gather onsite, the auctioneer works the crowd, and the hammer falls – or it doesn’t.

According to new research from UNSW Business School, around one in five auctions in Australia end without a sale, and for those sellers, the consequences can have a notable financial impact. The research, published in the Review of Finance, found that homes that failed to sell at auction subsequently sold for about 1.3 per cent less than comparable properties sold by private treaty.

This translates to a loss of roughly $9000 to $10,000 in dollar terms, based on average home prices across the study’s New South Wales and Victoria dataset. The premium delivered by a successful auction amounted to only around 0.7 per cent (or about $2000 to $2500) compared with private treaty sales. When the risk of failure was properly accounted for, the net expected advantage of choosing an auction narrowed to just 0.3 per cent.

“What surprised me most was how little attention is paid to the prospect of failure in the selling process,” said Dr Kristle Cortés, an Associate Professor in the School of Banking and Finance at the UNSW Business School.

“There is a lot of attention on successful auctions, especially those with bidding wars that sell for far above the reserve price. It is as if failure isn’t an option. Yet, many homes fail to sell at auction. And there is absolutely no mention of the risk of selling a home for a discount when deciding on which selling method to choose.”

Why auctions fail, and why it matters that some failures are random

The research drew on data from more than 480,000 residential property transactions in NSW and Victoria between January 2007 and December 2019. It focused specifically on properties that sold more than once, allowing the researchers to compare the same home across different sales and isolate the effect of auction failure from underlying property characteristics. To further confirm that the effect was causal, the researchers used external factors (including rainfall on auction day) to identify failures unrelated to the home's quality.

A/Prof. Cortés explained that auction failure generally occurs when there is a mismatch between what buyers are willing to pay and what sellers are willing to accept. Sellers often set their reserve price too high; sometimes because prices of nearby properties are not a fair comparison, or because they have not kept pace with shifting market conditions. Agent experience also matters, and the research found an association between less experienced agents and higher rates of auction failure.

To establish that the price penalty was caused by the failure itself rather than by some underlying flaw in the property, the researchers used two instruments that could trigger auction failure for reasons unrelated to the home’s quality. The first exploited rainfall: bad weather on auction day discouraged bidders from attending, which raised the probability of failure.

The second identified sellers of what the researchers called “the worst house on the block” – properties whose size, bedroom count and bathroom count fell more than one standard deviation below the neighbourhood average. These sellers were prone to anchoring their reserve price on nearby homes that were not genuinely comparable, leading them to set expectations too high.

“Auctions rightly fail due to low demand,” A/Prof. Cortés said. “But we also show that auctions fail less with more experienced selling agents. Those agents understand how important it is to find enough prospective buyers to avoid an auction failure.”

In both cases (rain and over-optimistic reserve prices), the researchers found that homes sold for less after a failed auction. The finding that even failures caused by bad weather led to price penalties was significant: it pointed firmly to the failure event itself, rather than any property-level shortcoming, as the source of the discount.

Stigma, discouragement and the psychology of the passed-in property

The research identified two psychological mechanisms that work in tandem to push prices down after a failed auction. The first relates to a stigma among potential buyers. When an auction fails, it becomes a matter of public record. When a property listing status is updated, prospective buyers are informed, and the property acquires a reputation for having been rejected. Even buyers with no direct knowledge of the auction could sense that something could be wrong with the property.

The second mechanism concerns sellers' discouragement. Having endured a public failure in an auction, the research found that sellers become less willing to hold out in subsequent negotiations, accepting less than they might otherwise have.

“A failed auction is a very public signal,” A/Prof. Cortés said. “Even though the reasons for failure are often ambiguous, buyers may infer that there is ‘something wrong’ with the property, creating stigma. At the same time, sellers may feel discouraged after a visible failure and be more willing to concede in subsequent negotiations. Both forces push prices down, even when the property itself has not changed.”

The research found that the ‘embarrassment factor’ amplified the penalty. Properties that failed multiple auctions sold for an additional 1.8 per cent less than those that failed once. Those that attracted no bids at all received prices about 1.7 per cent lower than single-failure cases. Failures in hot markets (where demand was high and auction failure was unusual) still carried larger discounts, because the surprise of the outcome intensified the negative signal.

The data also revealed a pattern that pointed directly to the psychology of the bargaining table. After a failed auction, properties were 8.2 percentage points more likely to sell just below a round-number price threshold (e.g., multiples of $50,000) than those sold by private treaty. The finding suggests that dispirited sellers are losing ground in the final stages of negotiation over differences that relate more to perceptions than to real market value.

The discount fades, but not quickly enough for every seller

The research found that these failed auction ‘price penalties’ change over time. The discount from a failed auction gradually diminished and lost statistical significance for properties sold more than six months after the auction failure. A/Prof. Cortés noted that it took roughly six months for the penalty to level out to where the property would likely have sold under private treaty from the outset.

“The fact that the discount fades suggests that stigma plays a key role,” A/Prof. Cortés said. “As time passes, new buyers enter the market who are less aware of the failed auction, and the negative perception gradually dissipates. If the discount were driven purely by information about the property’s quality, we would not expect it to disappear over time.”

However, not every seller has six months to wait. Those under pressure to sell quickly (whether due to financial constraints, a property purchase already under contract, or other life circumstances) face a more difficult position. As A/Prof. Cortés observed, the public nature of the auction process means that psychology shapes outcomes in ways that standard economic models rarely capture.

“Auction outcomes are shaped not just by fundamentals, but also by psychology,” she said. “The public nature of auctions means that perceptions, embarrassment, and stigma can influence prices in ways that standard economic models often overlook.”

What sellers should consider before choosing auction

The research did not conclude that auctions are the wrong choice, as they do generally deliver higher prices on average for those who succeed. But the odds are more unevenly stacked than many sellers appreciate: the upside of success is smaller than the downside of failure, particularly in the short term.

“Sellers should understand that auction failure is not rare, and it is not costless,” A/Prof. Cortés said. “The potential downside from failing can be larger than the upside from succeeding, especially in the short run. If failing an auction is not an option for the seller, they should consider selling via private treaty or lowering their reserve price at the auction.”

The research also found that certain sellers and property types faced greater exposure. Properties harder to compare with nearby homes (such as those with unusual configurations or features not shared by neighbouring properties) are more vulnerable to the reserve-price anchoring problem. In addition, units also tend to carry larger discounts than houses when auctions fail.

“Auctions beget auctions,” A/Prof. Cortés said. “Sellers should think carefully about their tolerance for that risk, their time constraints, and the current market conditions. If a seller cannot afford to wait several months for the stigma of a failed auction to fade, they may prefer to sell via private treaty or reduce their reserve price in the auction.”

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