Are Auction Clearance Rates a Good Measure of the Market?

By Peter Sarmas on 26 Jun 2013
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Are Auction Clearance Rates a Good Measure of the Market

 

Conflicting reports on Australia’s housing market emerged in May, when two of Australia’s most respected property research houses released contradictory data on the bearing of market confidence and dwelling values.

On one side, RP Data-Rismark used national house price data to report a fall in confidence and housing values; while Australian Property Monitors (APM) were upbeat about the market, reporting positive sentiment on strong auction results in the capital cities on the East coast.

Data from APM revealed that Melbourne’s auction clearance rates averaged 70 per cent since Easter, up from 65 per cent before the April break. While Sydney’s weekend auction clearance rates recorded their best Autumn auction result since 2010, with an average 75 per cent clearance rate for the last two months.

The robust auction results in the capital cities lead Dr Andrew Wilson, senior economist for APM to report, “Sydney has completed its strongest start to a home auction year in three years with price rises an inevitable consequence.”

On the flipside, RP Data-Rismark reported that dwelling prices in Australia’s major cities were softer for the second straight month in May, underpinned by lower consumer confidence. According to their stats, dwelling prices recorded a 1.2 per cent fall in May, after declining in April by 0.5 per cent.

Cameron Kusher, senior analyst at RP Data, said assertions by Dr Wilson that price rises are ‘inevitable’ on the back of strong auction results, is incorrect. “Auction clearance rates have been very strong,” said Mr Kusher. “But that won’t necessarily translate into property value growth because it’s all about the prices at which they’re selling those properties.” 

Rismark’s CEO, Ben Skilbeck explained, “There is one of two means by which metrics such as auction clearance rates, transaction volumes and vendor discounting improve; either buyers increase their offer price in order to meet vendor expectations or, alternatively, vendors reduce their expectations in order to meet buyer offers. The first is usually associated with a rising market, while the second relates to a flat or declining market.”

Given RP Data’s reporting of a flat market in May, one can assert that current market sentiments are underpinned by vendors correcting their expectations, rather than buyers increasing their offers on the auction floor.

Yet even if buyers are bidding up to secure a residence, Mr Kusher said that only one in five properties in Australia actually use the auction method to sell, meaning the reported strong auction clearance rates only represent around 20 percent of the total sales in the market.

So, how reliable are auction clearance rates when it comes to measuring market sentiments? A Deakin University paper in 2010, which asked a similarly probing question, concluded that “…anecdotal evidence from discussions with real estate agents working in the outer suburban residential markets suggests auction clearance rates have limited reliability as a market activity indicator.”

The same paper said the misrepresentation of auction clearance rates is often due to a lack of understanding by the media.  “Over time, the newspaper reports have appeared to increasingly use [auction clearance rates] as a means of measurement for the health of the housing market, and by extension, the strength of the broader [economy]. In spite of the adoption of auction clearance rates in this manner there appears to be little understanding of its derivation or interpretation.

That said, while the importance of auction rates is often exaggerated in the media, the success of auctions as a method of sale has proven merits, especially in the capital cities.

For example, a auction campaign has the capacity to create market buzz and urgency around the sale of a home. This can be effective in attracting genuine investors and buyers over a short four week campaign. In addition, the auction method also allows sellers to test the market waters, as the ‘reserve price’ (the minimum price the seller will accept) is never disclosed.

On the flipside, a private treaty sale advertises an ‘asking price’ designed to help kick start negotiations with buyers. With the private treaty method of sale, the buyers do not know what other buyers are offering on the property, and if there is competition, buyers may offer well in excess of the asking price to secure the property.

While both methods of sale have their pros and cons, before you choose to sell your home by either auction or private treaty, seek advice from a local agent on which method is most effective in your region.

 
About the Author

Peter Sarmas is a Certified Property Investment Advisor (PIAA) and Vendor/Buyer Advocate. Before becoming the founder of Street News, Peter completed a Degree in Applied Science (Chemistry) and a Graduate Diploma in Property Valuations (Hons). Peter believes property investing is a major and potentially risky undertaking. In his view, everyone should have an independent person acting on their behalf when seeking property investment advice.

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