Will the Recession Lead to Fewer Auction Properties Coming to Market?

The latest growth forecasts from the Office of Budget Responsibility suggest the UK economy will contract by 1.4% in 2023, with only modest growth of 1.3% in 2024. While this is bound to affect the property market overall, in this report we will look specifically at how the impending recession might affect the number of properties at auction.

This is perhaps a particularly interesting question to consider right now. It’s often said that auctions are a barometer for the property market. So movements in the auction market today can indicate trends that will appear in the wider property market tomorrow.

Recession and the supply of auction property

Recessions have a track record for causing turbulence in property markets. Some owners and investors are forced to sell for financial reasons. Forced sales can actually boost the volume of property in the market in these times.

Financial distress can lead to more property repossessions. Auctions are traditionally a way that distressed property comes to market, again adding to transaction numbers.

Recessions tend to slow the property market. Sales take longer to agree, and more sales fall through. So sellers are maybe more likely to consider selling at auction – perhaps including those who might not have considered auctions previously. Selling at auction offers property owners a more predictable timeline and more certainty that the sale will go through.

Values become unclear and potentially volatile in recessionary times. It becomes harder for estate agents to value property in these situations, especially if the volume of transactions falls and provides fewer comparables. But an auction will (or at least should) always establish true value for a seller.

In a recession, sellers who do not have to sell are perhaps less likely to do so with many preferring to ‘sit tight’. This could mean reduced numbers generally in the property market, as well as at auction.

How recession might affect demand at auction

It is sensible to consider not only the supply side but also the demand side.

Overall, buyers tend to become more cautious in a recession. Concerns about the future may prompt many to decide not to buy for now.

Affordability becomes stretched, meaning buyers can only afford to pay less and many cannot afford to buy at all. Both increased interest rates and the increasing cost of living deliver a double whammy.

Some buyers may find that they cannot even obtain the finance they need to buy, so decreasing the buyer pool further – although cash buyers are important in the auction market.

An interesting counter to this argument, however, is that auctions are generally thought of as the place to find good value or even a bargain. This could potentially mean that more buyers are tempted to buy at auction in a recession.

The situation as regards buy-to-let landlords is an interesting one…

These buyers have been an important part of the auction houses’ customer base for some years now, but the climate for buy-to-let has become less favourable over recent years. On the other hand, many reports say that the demand for rental accommodation (as well as rents) appears to be soaring. This could push up yields and, theoretically at least, encourage some investors back to the auctions.

When considering auction volumes it is important to bear in mind that auction numbers vary notably across the year anyway (such as in the summer). So comparing month-on-month figures at auction may not always indicate a clear trend.

What do the auctioneers think?

James McHugh of McHugh and Co. feels that a more uncertain market could actually increase the numbers of properties being sold at auction. He says: “In my opinion, there will be more properties coming to auction, as once a property sells at auction it gives the seller certainty rather than when selling via an estate agent when the buyer could withdraw from the purchase prior to exchange of contracts.”

He points out that pricing will continue to be very relevant, however, adding: “As long as you have realistic reserve prices, we see the auction market a very good place to buy and sell.”

Andrew Binstock, Director & Auctioneer at Auction House London, says: “In theory, a recession should mean that there is more stock available and less buyers.”

“The last few months have already seen that trend, with our last two auctions having the largest amount of lots ever (250 and 270 respectively) whilst bidder numbers pro rata are on the decrease.”

“Buy-to-lets are the most likely to lose some of their audience as anyone requiring finance will now be very concerned that the yields cover the outgoings at the very least.”

He suggests what impact this might have on auction pricing: “I expect auction prices will see a small drop but nothing too drastic – as whilst there may be less people fighting over each lot, there should still be plenty of buyers in the marketplace in 2023.”