Watch those clearance rates
A falling clearance rate does mean fewer sales on the auction day and it may mean longer average days on market for auction properties overall.
Much has been made in the media of the recent changes in the Sydney market. “Sydney Home Prices Stall!” “Sagging Sydney Auction Market!” “Sydney Property Prices Flatline!” The sensationalism is nothing short of mind boggling.
Prompting these shocking headlines is a fall in auction clearance rates from a peak of 90% in mid-winter to the most recent finalised sale rate of 71%. At first glance, it does seem to be quite a drop, until you consider what the equivalent outcome in another industry might look like.
Consider, for example, that we were talking about a shoe store on Pitt Street. If the proprietor managed to sell 70% of all the shop‘s stock on Saturday, it would be a mightily impressive story. But for some reason, when it comes to property – with a much higher average transaction value – 70% is a disaster.
I should stop to add in here that there are several fundamental problems with auction clearance rates. The overall city-wide clearance rate masks the differentiated results between different geographical markets within Sydney – not to mention the different price segments within those markets. If we were to review some suburbs in western Sydney, for example, we would see clearance rates currently as low as 50%, or even lower.
But at the other end of the equation, looking at the properties we’ve taken to auction through our office in Drummoyne, we’ve had only one not sell at auction the whole year this year – almost 100% sale rate.
There’s another big problem with using clearance rates as a market barometer and that’s in their reporting. First of all, none of the data houses have a foolproof way to collect results in the short term, relying heavily on agents volunteering their results.
The secondary issue is that auction is a marketing process, not a day. The reported clearance rate accounts only for those properties sold under the hammer, whereas many auction properties sell in the hours, days or even weeks after the call.
Where should the cut-off be, in order to create meaningful results? Probably the other key factor to consider is what drives auction clearance rates. According to SQM research, the number of properties for sale across Sydney rose by 7.6% in September and is now 11.1% higher than one year ago.
Over spring, it’s quite likely the number of listings will continue to rise, as more sellers come to market in the traditionally busier months on the real estate calendar.
Put simply, the auction clearance rate is only ever the measure of the basic balance between supply and demand. Wherever supply increases without a corresponding increase in demand, the clearance rate will always fall.
A falling clearance rate does mean fewer sales on the auction day and it may mean longer average days on market for auction properties overall. But what a falling clearance rate doesn’t automatically mean is falling prices or a crashing market. Let’s be realistic. Neither of these things are likely in Sydney any time soon.
First published on ‘The Real Estate Conversation’