In 2014, the Queensland government passed legislation banning real estate agents from providing buyers with pricing information on auction properties.
The move sparked a fierce debate about the role of price guides in the property market. Some experts argue buyers need guidance to make informed decisions, while others believe the guides encourage deceptive practices.
Ultimately, the issue hinges on the extent to which buyers can trust sales agents to give accurate information.
What is a price guide?
When an agent provides a price guide, they are giving an estimate of the property’s market value, according to author of Real Estate Uncovered Peter O’Malley.
“A price guide is an indication of what a consumer could reasonably expect a property to sell for. Price guides are used in all sales processes,” he says.
In general, price guides come into play when properties are offered at auction, says McGraths Estate Agents chief executive John McGrath.
“In an auction, there is no fixed price. The price guide is there to guide buyers as to a range where the agent is expecting the bidding to be,” he says.
When Mr McGrath formulates an estimate for an auction, he bases his figures on comparable sales, the vendor’s expectations and other evidence from the market.
Some commentators, however, contend that without strict regulation and policies around how the industry is expected to formulate these guides, the whole process is susceptible to manipulation.
Buyers need to believe nothing, check everything and determine what the property is worth in their own mind
Given this uncertainty, buyers must consider whether a price guide is a good indicator of the eventual sales price. If you ask Mr McGrath, guides can generally be relied upon but it depends on the circumstances.
“I think a good agent will be able to discern within about 10 per cent the likely value of the property,” he says.
However, he cautions certain market conditions may make the auction outcome difficult to predict. There is always the possibility of buyers getting swept up by emotion and bidding beyond any reasonable predictions.
“It's probably hard right now in markets like Sydney that are extremely strong, where there are a number of instances where competitive bidding can push prices quite a bit higher than expected,” he says.
SQM Research managing director Louis Christopher suggests buyers should be cautious about placing too much weight on price guides.
“There is no guarantee that the property will sell for that price. There is no guarantee that the vendor even has the intention of selling for that price either,” he says.
Mr O’Malley takes an even stronger stance – he urges buyers to be highly sceptical of information provided by the agent before the auction. In his view, “a price guide is no guide at all”.
“Buyers need to believe nothing, check everything and determine what the property is worth in their own mind,” he says.
Why would agents misrepresent the price of an auction property? Mr Christopher says the practice, called “underquoting” or “bait pricing”, is designed to drum up attendance on auction day.
“The reason people do it is to encourage interest in the property, to get people to over-pay and pay more than what they wanted to pay,” he says.
Mr O’Malley suggests agents are taking advantage of the fact that lower price tags tend to draw bigger crowds.
“Agents have abused the system and deliberately quote low price guides to attract multiple bidders as a means of filling the auction,” he says.
As an example, the owners might put the reserve price at $700,000. If the agent provides a price guide of $550,000, several buyers with a maximum of $600,000 to spend might turn up hoping to bid. The property will seem to be in high demand and the sales price may get pushed up, even though it is out of the price range of most attendees.
“In the vast majority of cases, if an agent has used a below market price to attract bidders, the sale will still end up at market price or close to it but a lot of buyers will be mislead and financially damaged in the process,” Mr O’Malley says.
Buyers who fall prey to underquoting may end up severely out of pocket, according to Mr McGrath.
“It costs buyers a lot of money because when they're getting ready to go to auction, they get building reports, pest reports and contracts prepared,” he says.
In addition, buyers may suffer an emotional cost after being fooled and begin to doubt the trustworthiness of agents across the board.
“If buyers can't trust what agents are saying, it's terrible for all sides of the equation. Buyers lose out, sellers lose out, agents lose out,” Mr McGrath says.
In his experience, underquoting remains a concerning but rare phenomenon.
“It's sad to say but I suspect that 10 to 15 per cent of the real estate industry provide guides that I think are unrealistically low in an attempt to get buyers,” he says.
When Consumer Affairs Victoria initiated a crackdown on underquoting in early 2014, they reported agents had “close to a 100 per cent pass rate”. However, Mr Christopher and Mr O’Malley both find this statistic dubious.
“That's not the reality on the ground. I think most agents would laugh at that. Victoria is notorious for underquoting,” Mr Christopher says.
He suggests it is easy to identify a property that has been underquoted – it has been passed in at auction above the advertised sales price.
Mr O’Malley believes Consumer Affairs may not be scrutinising the market closely enough.
“The only way you can catch agents who are bait pricing is to watch the market intently and consistently, which the regulators are not doing,” he says.
Banning price guides
One state has taken a radical step to stamp out the possibility of underquoting. In Queensland, new legislation governing the real estate industry will make it illegal for agents to provide price guides for auction properties.
REIQ deputy CEO Antonia Mercorella explains existing legislation is vague on what information agents can give. The new regulation is designed to remove these grey areas.
“[The new regulation aims] to clarify the position in relation to auction price guides and to make it abundantly clear that price guides in connection with auction properties are not permitted,” she says.
Under the new rules, agents will be prohibited from providing buyers with either a verbal or written price range for auction properties, she explains. Agents may still provide a comparative market analysis (a document analysing similar sales in the area) but only with the vendor’s permission.
Another narrow exception exists for online listings websites, Ms Mercorella explains. When buyers search online via price, auction listings will pop up in the approximate price range categories. However, the listing is not allowed to display a price and buyers should not rely on this search result as an indicator.
“That is not to be misconstrued as a price guide. It's really just to give you an ability to work out if the property is somewhere in that range,” she says.
Ms Mercorella says the changes were motivated by two desires: to prevent underquoting and keep auctions free from interference. While Ms Mercorella believes underquoting is not a major issue in the Queensland market, she thinks the state has taken a proactive stance.
“We're proud of the fact that here in Queensland, we don't have a high level of complaints around that issue,” she says.
Mr O’Malley agrees with this assessment and applauds the government for taking preventative steps to safeguard buyers’ interests.
“They've got on the front foot and the government in Queensland deserves credit for coming up with preventative laws that protect consumers,” he says.
While Mr Christopher sees flaws in Queensland’s solution, he believes it is better than letting the issue go unchecked.
“It's not a perfect way to stamp out underquoting but having no price guide is better than having a false price guide. A false price guide, taken to its extreme, is effectively misleading and deceptive conduct with regard to a product,” he says.
Agents have abused the system and deliberately quote low price guides to attract multiple bidders
On the other hand, Mr McGrath is scathing about the new regime, calling it “the most backwards piece of legislation I have seen in 30 years”. He believes the approach will damage the market while doing little to punish dishonest operators.
“The solution to underquoting is not to ban quoting at all. What you do is eradicate the rogues in the industry that systematically underquote. You get them out of the industry so that those who tell the truth and provide a valuable service can continue doing so,” he says.
Another issue the legislation aims to address is interference in auction outcomes. Ms Mercorella says agents who provide price guides may be damaging the vendors’ chances of getting the best price for their property.
“The whole objective of an auction in our view is to allow the market to determine the value. If you place a price on a property, you may not be acting in your vendor's best interests by having an impact on the ultimate sales price,” she says.
However, Mr McGrath rejects this viewpoint as old-fashioned and out of touch.
“The world has changed. A price guide in no way retards the price. All it says is, if you've got $700,000 and the price guide is $900,000 to a $1 million, don't waste your time,” he says.
“Would you want a buyer with $500,000 to spend coming to an auction for a property worth $1 million? No, you don't.”
Mr McGrath argues providing buyers with a price promotes honesty in the industry and helps buyers make better choices.
“This is the age of transparency and the age of information. When you're looking to buy something on the internet, you can find out everything you need with one or two mouse clicks. This is not a period in our evolution that we should be hiding facts and information,” he says.
As the legislation will come into effect later this year, its impact on the auction market remains to be seen. Ms Mercorella predicts little will change because price guides are already uncommon in Queensland.
Moreover, auctions are comparatively rare in the Sunshine State. On Saturday June 7, for example, Australian Property Monitors reports only 65 auctions took place in Queensland, compared to 258 in Melbourne and 326 in Sydney. Similar results are recorded for most weeks of the year.
“It's fair to say that here in Queensland, auction is not the dominant form of sale,” Ms Mercorella says.
Mr McGrath predicts the new measures will decrease this number even further by damaging vendors’ chances of a successful auction.
“I think Queensland sellers will miss out on many buyers on their auction properties because buyers bypass properties with no price guides,” he says.
Investors who want to buy at auction without a price guide will have to do more legwork, Mr Christopher says. He urges investors to do their own independent research and consider getting professional assistance, such as an independent valuation.
Mr O’Malley believes other states will look to Queensland’s example to see how the changes affect buyers and vendors.
“It may play out better for consumers than a lot of people give it credit for, opening up the way for other states to adopt it,” he says.
However, Mr McGrath suggests a more likely scenario is the legislation being rolled back under protest from consumers.
“I think inevitably the government and the REIQ will see the error of their ways and they'll reinstate price guides. In the meantime, I think it's going to be a terrible scenario,” he says.
The experts can agree on one thing: whether a price guide is provided or not, investors must do their own research to be fully informed.
“As an investor, you should always base your assessment of value on market evidence, not agent's price guides,” Mr O’Malley says.