What auction clearance rates don’t tell you

As the spring residential property market gears up, analysts will be watching weekly auction clearance rates as an indicator of market conditions. But, as with most statistical real estate indicators, we need to dig a little deeper to understand the basis of these figures and what they do and don’t tell us. There is a widespread myth that the higher the percentage clearance rate, the more robust the market.

Auction clearance rates do provide a broad-based snapshot of geographically undifferentiated activity across a city and metropolitan area, but taken at face value they can be widely misinterpreted and their importance overemphasised. In addition, clearance rate figures are voluntarily supplied by selling agents, and media outlets vary in the amount of detail they include. Unless an individual hunts for the finer detail, a skewed interpretation of activity can result.

For instance, the percentage of auctions vs sales that take place either side of a scheduled auction is often not spelt out. Therefore, the figures can obscure how many properties may have been sold prior to or after an auction, by private treaty, tender or a boardroom auction prior to the public auction.

Confused? Then let’s make it clear what these percentages actually tell us.

The clearance figures we read in the press are based on three types of sales classifications:

• Sold at auction – properties sold from the time the auction is scheduled until midnight that day.
• Sold before auction – properties sold from the moment of listing until the time the auction begins.
• Sold after auction – those properties sold from midnight of the auction day until midnight the following day.

Real estate institutes use the figures to plot any increase in the number of properties being sold by auction rather than by private treaty. For instance, in Victoria, the REIV says that significant increases in the number of properties being sold at auction indicate a buoyant market, because agents and vendors are more confident of better auction outcomes.

Bear in mind that the inner urban areas of Melbourne and Sydney in particular, with their consistently higher levels of demand versus supply, would tend to favour auctions across the year, whereas private treaty methods are more often the norm in outer suburban and regional centres and smaller capitals.

If we take Victoria as an example, the REIV’s latest figures show that in the current buoyant sales market, private sales have dropped in favour of auctions in most inner-urban locations. Auction sales in Melbourne’s CBD and inner ring of municipalities – two to 12 kilometres from the CBD – have totalled 9879 so far in 2007 compared with 7440 for the same period in 2006. Private sales in the same areas totalled 7910 so far this year, but stood at 8045 for the same period last year. At the same time, total sales – both at auction and private treaty – increased from 15,485 in 2006 to 17,789 so far in 2007, indicating that a higher number of properties have come on to the market across the year and buyer demand has so far kept clearance rates above 80%.

In Sydney, auction clearance rates have ranged between 61% and 71% over the past three weeks, according to figures from the REINSW. But, on closer inspection, clearance rates can be as low as 49% in South Sydney and a buoyant 71% in the eastern suburbs. Figures are fine, but none of the data gives us a benchmark for relative market buoyancy.

Across an entire year – unless there has been some major impact on the property market – we would expect to see a clearance rate of 60–70% and this range indicates a balanced market. Clearance rates consistently above 80% indicate a very high level of buyer demand and a reduced supply. For instance, across Melbourne’s inner-urban areas, clearance rates so far this year have ranged between 81.8% and 91.6%. For the same period last year, the range was from 68.3% to 85.1%. Less buoyant geographical areas, where the demand/supply ratio is more balanced, return much lower clearance rates.

Once the busier spring market begins – generally from the first week of October to the second week of December and more stock comes on to the market, clearance rates anywhere between 60% and 80% would be considered normal. But, the temptation is to interpret any drop in clearance rates as indicative of falling prices and a slowing market. Not so!

It is only when the rate falls consistently below 60% that it might herald a market change, and usually it is not because values are plummeting! This could indicate a lower volume of buyers, that vendor expectations are too high to effect large numbers of sales through the normal auction process, or that vendors are being pressured to sell. A significantly oversupplied market, well in excess of even strong demand, can also dilute the clearance rate outcome.

If the rate remains consistently above 70% at the start of spring and remains at that level mid-way through December, it is often a sign of buyer strength that is likely to remain consistent in the market once it gears up again in February. We could then expect to see a strong level of opening activity off the back of continuing pent-up buyer demand. If clearance rates remain consistently above 80% during spring, then that could be regarded as an extraordinary level of demand, especially if the market is well supplied.

Finally, given the voluntary nature of sales reporting in the industry, the data must necessarily be viewed as incomplete. At best, the figures should be viewed as informative rather than directive. Further, there is nothing to stop an agency only reporting in on weekends where their clearance rates make hay for the business! For instance, they may well report in when they sell 80–100%, but decide not to bother on weekends when they only do 50–60%.

Until we have mandatory reporting of all sales in a regular and timely fashion, investors should view this data as nothing more than what is a very broad indicator of trends. Like all data associated with residential property, clearance rate figures are an interesting insight into market activity, but offer no substitute for actually getting out into the marketplace to gauge the level and behaviour of buyer demand. Each of the different market sectors – inner, middle and outer urban – need to be studied individually.

This story first appeared in the Eureka Report.