Defaults rise when the market is weak, so auction volumes rise as general activity falls
A worked RES examination question on primary secondary market, from our Paper 1 bank — with the rule it turns on, and why each of the four options is right or wrong.
The question
Ms Pereira has a client with cash to deploy who has heard that property sometimes changes hands below market value at auction, and who has asked her to watch that market on his behalf over the next two years. She has never handled an auction sale and wants to know when to be paying attention.
Over lunch she puts the question to a colleague of nine years' standing, who tells her that auction volumes peak when the market is strongest, on the reasoning that a strong market is when the greatest number of sellers come forward and when buyers are most willing to bid.
Which statement is correct?
The answer, and why
Answer: B
The rule. The auction market is counter-cyclical. It is busiest in a downturn, because supply comes largely from mortgagee sales — lenders realising security after borrowers default. Defaults rise when the market is weak, so auction volumes rise as general activity falls.
Why B is correct. It identifies both the timing (downturn) and the mechanism (lender-driven sales following default). The mechanism is what makes the timing follow.
The other options.
- A is the colleague's reasoning and the intuitive answer: more activity everywhere should mean more auctions. It inverts the relationship by overlooking who supplies the market.
- C treats volumes as an administrative matter. Supply is driven by defaults, not scheduling.
- D restricts auctions to commercial property. Mortgagee sales are frequently residential.
Exam note. Ask who supplies the market. Once the answer is "lenders realising security", the counter-cyclical timing follows without separate memorisation.
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