Why you should resist peer pressure and focus on fundamentals when buying a home in a quiet market

If you’ve ever waited 45 minutes for a restaurant table while neighbouring establishments are empty, you’ll understand the concept of “social proof”. 

A line out the door signifies strong demand, and diners guided by the actions of their peers continue to join the queue, assuming the meal is worth the wait.

Auctions in a boom market exhibit the same principle. With a group of qualified buyers in the one place continually topping each other’s offers, it’s very easy to see the demand for the property and establish its value.

Last year, there were reports of a man driving past an auction in progress suddenly pulling over, bidding, and eventually buying the property, splashing more than a million dollars on a home he hadn’t been inside in an extreme example of social proof.

The 80-strong crowd of onlookers, five active bidders, and the nation’s rich appetite for property at the time would have given him the confidence to submit the winning offer.

While uncommon, this scenario was emblematic of 2017’s booming east coast property market, characterised by big crowds of bidders, high clearance rates and strong results above reserves.

This year, things have been a little different. Crowds have thinned out, and while some auctions still draw dozens of onlookers, buyers have become more cautious, with a fear of overpaying replacing the fear of missing out.

With fewer bidders and less exuberance in the property market, buyers must use more than just social proof to validate their decisions because the risks of making the wrong move are greater than ever.

• Related: Hold or fold? What to do when the property market dips
• Related: How to avoid stretching your home-buying budget too far
• Related: When to compromise and when to put your foot down

Avoid the common pitfalls

Relying solely on the actions of others instead of actually undertaking due diligence is a lazy and reckless way to buy property for a number of reasons.

Auctions can be manipulated to create the perception of demand, artificially boosting buyer confidence and increasing competition.

An aggressively low price guide and reserve may make buyers feel they will secure a bargain, but can instead lead to strong bidding and momentum, according to Wakelin Property Advisory director Jarrod McCabe.

“Sometimes that can be a false confidence,” he said. “You’ve got multiple people bidding because the price expectations on that property are below what people think it’s worth.”

Another challenge for buyers is navigating unrealistic vendor expectations. If the bidding stalls below the reserve, agents may coax bidders to increase their offer and effectively bid against themselves.

But it’s now more important than ever for bidders to resist falling for those tricks, according to buyer’s agent and director of Buyer Solutions, Janet Spencer.

“Buyers have to remember that the auctioneer and the selling agent are working for the vendor, not for them,” she said.

Bidders should pick a limit and stick to it, based on their own analysis of comparable properties, rather than those hand-picked by the selling agent.

“If you overpay and the bank values the property less than what you pay, you can have a funding crisis on your hands,” Ms Spencer said.

Focus on fundamentals

Instead of blindly following trends, buyers should prioritise properties with strong underlying fundamentals, such a sought-after location in close proximity to good schools, transport and employment options, as these are the primary drivers of price growth in the long term.

It’s just as important to avoid less desirable properties where price growth may be subdued. Properties on main roads or those considerably smaller than the suburb’s average can see less demand in the long run, and poor natural light and minimal outdoor space can hamper a home’s performance over time.

“You need to be confident that you’re buying the right property,” Mr McCabe said. “Once the market starts to flatten or soften, less high quality properties come on the market, because discretionary vendors don’t need to sell.”

Take advantage of opportunities

Buyers who can exhibit both confidence and restraint are well placed to make a smart purchase, especially as price growth mellows, according to buyer’s agent John Carew of Mayfield Property Buyers.

“With the market being more depressed there are some really good buying opportunities out there are the moment,” he said. “Long term, people are going to look back and say 2018 was a really good year to buy property.”

And if a property passes in or is withdrawn before auction, buyers may be in a more favourable negotiating position than in recent years, and should be prepared to use that advantage to secure a home for fair market value.

“If you’re fortunate enough to not be competing with a lot of buyers, negotiate hard and get it for the right price.”