Forget tickets to footy or cricket. The hottest spectator sport in Melbourne each weekend is free, and can usually be found on a stroll around the neighbourhood in search of one of the hundreds of real estate auctions being staged across the city.
Free, that is, unless you are a bidder. In that case, you could end up paying dearly.
If one is looking for heart-stopping drama, it's hard to beat the weekly spectacle of regular folks jockeying to make the biggest purchase of their lives in a heated contest of one-upmanship, replete with bravado, financial recklessness and tears. In much of Australia, particularly in Melbourne and Sydney, this is how they sell homes.
The emotionally charged auction process, however, has helped fuel Australia's runaway housing sector, where gravity-defying prices have some analysts warning of an impending implosion that could drag down the country's long-running economic prosperity.
Australia's real estate market was recently named the most overvalued on the planet - by 63.2 per cent - according to a survey by The Economist. Prices in Melbourne, for example, are up 18.8 per cent in a year, even as much of the developed world is still recovering from the global financial crisis. According to the OECD, the ratio of house prices to income in Australia is now about 36 per cent higher than its long-term average, and prices are well above the average of other industrialized countries.
Amazingly, Australia's housing boom persists despite sharply higher interest rates. The fixed rate on a five-year mortgage is now above 8 per cent; this follows the Reserve Bank of Australia's move to increased its key lending rate by a full percentage point this year to 4.75 per cent in a bid to contain inflation and keep the housing market in check.
Morgan Stanley economist Gerard Minack said in a report earlier this year that Australia's market is overvalued by at least 40 per cent.
"There's a word for a financial asset that is overvalued by 40 per cent, so let's use it: housing is a bubble. Buying an asset that's overpriced never ends well."
The way homes are sold in Australia may help to explain why property prices have flown so high.
Prospective home buyers assemble inside a property for sale as an auctioneer whips up the bidding, much like an auction for art or livestock. Bidders feel an adrenalin rush from the contest, where prices can shoot up to $710,000 Australian ($719,000 Canadian) for a cramped, two-bedroom Victorian with a leaky roof. The pressure and immediacy of the auction induces rapid-fire bidding in increments of thousands of dollars at a time, often taking prices far above what buyers originally set out to pay.
"It's human nature. They get involved, and they don't want to lose," says Chris Murphy, a smooth-talking real estate agent who has been auctioning houses in Melbourne for a quarter-century. "It gets competitive. There is a bit of a must-have mentality about it too," Mr. Murphy says, as he packs up his two-seater Mercedes AMG following a Saturday afternoon auction in Abbotsford, a Melbourne suburb.
Auctioneers all seem to be cut from the same cloth. Nearly all are men - articulate, well attired, quick-witted and invariably good-looking. Auctioneers typically wear dark suits and ties and begin the proceedings by extolling the merits of a particular property.
"It is the Paris end of town - the epitome of downtown living," says one auctioneer standing outside a condominium in Melbourne's central business district. "It is a lifestyle desired by many but enjoyed by few," he adds.
At a heritage building overlooking the laneway cafés and restaurants on Desgraves Street in downtown Melbourne, more than 50 people crowd into a 764-square-foot (71-square-metre) apartment that the auctioneer describes as "an exceptional opportunity" that "doesn't disappoint."
The atmosphere before the auction drips with anticipation. It's like the mood before a race. People eye each other warily and speak in hushed tones.
The bidding for the shabby one-bedroom apartment begins with an offer of $380,000 (Australian) that the auctioneer rejects as below the vendor's reserve minimum bid of $450,000. Soon, the bids are up to $520,000, jumping in $10,000 increments.
"At $520,000, we are playing for keeps," the auctioneer says. Soon the offers are rising by $5,000, and one of four bidders, a fashionably dressed woman in a black leather jacket, pulls out. She looks relieved. When she was bidding, her pallor suggested that she might vomit.
At $540,000, there are three bidders left - a couple in their thirties, a single man, and an Asian woman whose outfit prompts the auctioneer to call her "the lady in red." They are now raising their offers by $2,000 increments.
At $546,000, the lady in red stops bidding. At $552,000, the auctioneer says "Let's keep on bidding; I'll tell you when it gets too expensive." The transfixed crowd titters. The offers continue all the way to $579,000.
"Five-hundred and seventy-nine-thousand dollars?" asks the auctioneer. "Imagine if this was London, Hong Kong or New York?"
That elicits three more bids from the two potential buyers who top each other's offers by $250 each time. At $580,000, the couple stops raising their hands. The single man wins the apartment for $580,000 and the crowd erupts in applause.
Proponents argue that auctions are transparent, keeping the process in the open. Unlike in Canada, say, where a potential buyer blindly submits an offer to an agent, people get to see exactly what and who they are up against.
But many real estate experts and economists argue that auctions artificially inflate property values as desire and emotion have a greater chance of overwhelming prudence and logic.
Timo Henckel, a research fellow and lecturer at the Australian National University in Canberra, says the country's property market is inflated, and a series of interest rate increases are starting to squeeze overleveraged homeowners. Australian mortgage debt when coupled with personal debt is nearly 100 per cent of the country's gross domestic product - higher than it was before the global financial crisis.
"I can't see how it can be sustained … a crash is a real possibility," he says.
Frenzied housing auctions are only reinforcing price momentum with a process that strongly favours the seller, according to the professor.
"I find the auction system surprising and annoying," Prof. Henckel says.
A number of studies have found that housing auctions do, in fact, increase prices. A 1996 study led by Penn State University professor Kenneth Lusht found that auction sales in Melbourne created a premium of $19,326 or about 8 per cent over houses sold by private agreement. A more in-depth study published in the Australasian Accounting Business and Finance Journal that tracked sales in Australia's five largest cities between 2004 and 2009, also found that auction sales led to higher prices compared with properties sold privately.
Although regulations were recently strengthened to prevent it, dummy or fake bidders are not uncommon. They are used to get the bidding started and keep it lively. One property owner in Melbourne said her agent gave her a profile of the ideal type of dummy bidders to recruit from amongst her friends when putting her house up for auction - one single male in his 40s and a couple in their 30s.
Regardless, there has been little call in Australia to outlaw the auction process. Homeowners have a choice, of course, to sell their properties privately if they wish. Still, the fact that the number of auctions staged tends to drop when the market cools suggests that sellers know that an auction is usually the best way to get the highest possible price for a property.
And one of the most important factors is having the right person standing on your property soliciting bids. Mr. Murphy, the veteran auctioneer, certainly thinks there is no better way to sell a home.
"It's a terrific environment. It is a show. You can tell I have fun with it. I like being the centre of attention. You are in control, it is great," he says.
"And you can help people achieve their goals and their aspirations. That's what I like about it."
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LUXURY HOUSING
Country to country, Australia's average house prices are the highest in the world
According to the demographics and urban planning research firm Demographia, the country of Australia has the most unaffordable housing market in the world. (Vancouver is ranked as the most unaffordable city market ahead of Sydney).
There are other factors that have contributed to Australia's buoyant market, including the fact that the country suffers from a shortage of actual housing units, partly owing to strong immigration rates. But some analysts say Australia's housing auctions have helped inflate a real estate market that is set for a major price correction.
Average house prices in Australia's eight state capital cities as of March, 2010, in Australian dollars.
Sydney: $580,000
Melbourne: $468,000
Brisbane: $460,000
Adelaide: $403,500
Perth: $517,000
Hobart: $352,300
Darwin: $529,000
Canberra: $550,000
Source: Australian Bureau of Statistics (latest statistics available)