Research Discussion Paper – RDP 2014-09 Predicting Dwelling Prices with Consideration of the Sales Mechanism Abstract

Using dwelling prices in Australia's two largest cities, we consider whether the way in which a property is sold, either through an auction or a private-treaty negotiation, is informative for predicting dwelling prices. We find evidence to suggest that average prices of dwellings sold at auction are informative for forecasting growth in average private-treaty prices and average sales prices overall. In contrast, we find little evidence to suggest that dwellings sold through private-treaty are similarly informative.

Interpreting these results using two models of price determination – an English auction where buyer values are positively correlated, and inferred through the auction process, and a private-treaty sale where the price is determined by a Nash bargain – we find that auction prices better reflect a common trend in prices and are therefore more useful when forecasting. In contrast, private-treaty prices are affected by shocks that are specific to that mechanism of trade, such as changes in the relative strength of the bargaining positions of buyers and sellers, or changes to the dispersion of valuations. These shocks appear to reduce the usefulness of private-treaty prices for forecasting or measuring short-run movements in the common price trend.

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