How useful are auction clearance rates? Hotspotting's Terry Ryder

How useful are auction clearance rates? Hotspotting's Terry Ryder
How useful are auction clearance rates? Hotspotting's Terry Ryder

EXPERT OBSERVER

Media places undue reliance on auction clearance rates as a barometer of all things real estate. Some commentators appear to regard them as the prime measure of the health of our markets. Even the Reserve Bank seems addicted to the weekly reports on clearance rates.

It’s a flawed policy for many reasons. The figures themselves are notoriously unreliable, if not bogus; they tell us nothing worthwhile about the vast majority of locations in the nation; and even in the two biggest cities where auctions are prevalent, they’re a snapshot of only narrow sectors of the overall market.

Auctions are big in Sydney and Melbourne but are not prominent elsewhere. Even in the two big cities, they tend to focus on the prestige end of the market, so don’t necessarily inform us about the wider scenario.

Until the recent revival, we had a year of poor clearance rates in Sydney and Melbourne, but this failed to reveal key elements of markets within those cities. In Melbourne, the top end suburbs were suffering big declines in their median prices, but pricing was holding up strongly in many of the outer-ring areas such as Melton and Cranbourne.

In Sydney, the ultra top end (suburbs with median house prices above $2 million) did not suffer price decline. Many of those suburbs have median prices higher than a year ago. The faltering auction clearance rates told us nothing about that or about the solid resistance to price decline (minor drops only in median prices) in many of the outer-ring areas. Meanwhile, prices in Sydney’s middle market dropped a lot.

Elsewhere in capital city Australia and throughout regional Australia, auctions are irrelevant as a market barometer. Brisbane, Perth, Hobart, Canberra, Darwin, Newcastle, Wollongong, Ballarat, Bendigo, the Sunshine Coast, the Gold Coast and elsewhere - despite the best efforts of real estate agents, auctions are not the prime choice for vendors across the broad sweep of the nation.

So auction clearance rates this week in Sydney and Melbourne tell as nothing about the health of markets nationwide. The media’s focus on this reflects the reality that most of our major media comes out of the two biggest cities and writers are obsessed with those markets, to the exclusion of all other locations.

So for several years we heard about a “national property boom” that never existed. Then for the past couple of year we’ve read about a “national market downturn” that also never happened. And now, god help us, media is spruiking a “national property market revival” which is also fundamentally about Sydney and Melbourne.

Brisbane isn’t “recovering” because it didn’t have a major downturn, nor Adelaide or Canberra - or most of the rest of the nation.

It’s worth noting that 16 million Australians - the vast majority - don’t live in either Sydney or Melbourne.

The biggest problem with clearance rates is that they’re the worst kind of dodgy data. Clearance rate figures abound with furphies - often sales that did not occur under the hammer at auction are claimed as auction sales. There’s also the reality that agents are more likely to report the results of auctions that are successful than those that are not.

A 75% clearance rate means that 75% of the auctions reported by the agents allegedly resulted in a sale under the hammer. But the figures take no account of the auctions that took place during the weekend for which the results were not reported.

Media generally reports the preliminary clearance rates. The final clearance rates, once more results are in, are always significantly lower but seldom are reported. 

In the past I have researched clearance rates and found that the published figures are always much higher than the true figure, because so many of the unsuccessful auctions were not reported. I estimated that a true clearance rate was usually 12 to 15 percentage points lower than the claims in the media.

More recently, Louis Christopher of SQM Research has researched this area and came to similar conclusions. So, if media reports an auction clearance rate of 75%, the true figure would be closer to 60%.

The research conducted by Christopher’s SQM Research team noted that, as the Sydney and Melbourne booms wound down over the past 1-2 years, the number of unreported auction results rose. Christopher said, based on his latest research and also analysis conducted in the past, that around 70-75% of unreported auctions were failed auctions. 

On one weekend in Sydney last year that was studied by Christopher, the reported clearance rate was 76%. But 239 of the scheduled 836 auctions were not reported. 

If we assume, as Christopher suggests, that 70% of the unreported auctions did not achieve a sale, then the true clearance rate was 63% - well below the reported 76%.

On the same weekend, media reported a 77% clearance rate for Melbourne. But 256 auctions went unreported and the true clearance rate was 65%.

So, while clearance rates have a part to play in analysing major markets, they need to be considered alongside other data. In isolation, they’re not particularly useful.

Terry Ryder is the founder of hotspotting.com.au

[email protected]

twitter.com/hotspotting

Terry Ryder

Terry Ryder

Terry Ryder is the founder of hotspotting.com.au.

Tags: 
Terry Ryder Clearance Rate

Community Discussion

Be the first one to comment on this article
What would you like to say about this project?