Monthly Archives: March 2016

Chapter 39 – Interpreting the auction clearance rate

The most commonly quoted indicator used to assess the performance of the real estate market is the auction clearance rate. Simplistically, if the auction clearance rate is high, property pundits say the market is going well. If the clearance rate is low, below 50 percent, they say the market is in trouble. It’s worth looking at how and why the clearance rate has become the indicator of choice. Finding reliable and accurate data on the real estate market is almost impossible. Unlike the stock market which is dynamic and has instant price reflection in real time, the reporting of sales results in real estate remains cumbersome. There is no centralised point where all sales results are collated and displayed. If there were such a system in place, the real estate market would be able to offer accurate and insightful information on how the market is performing at any one point in time.

Sales results only become publicly available upon settlement of the sale. The exchange of contracts relating to those sales could have happened any time from four weeks to four months before the settlement is reported. A lot can happen to a market in four weeks and real estate markets can change completely within four months. The only way to have total clarity in the real estate market is if it were compulsory for every transaction to be reported to a centralised reporting authority at the time contracts are exchanged. The market could then be assessed in real time. This is a good idea in theory but the desire for accuracy in the market clashes with an individual’s right to privacy.

Therefore, the auction clearance rate is used as a second best option for a key market indicator in real estate because it is the closest thing to real time sales. All the weekend auction results are collated from across the country on Saturday night and published in the print media on Sunday morning. Pundits, economists, market watchers, the media and consumers then draw sweeping conclusions about what is happening in Australia’s markets via a glance at the weekend’s auction results.

So what does the auction clearance rate really tell us each week? Essentially, it informs us of the percentage of buyers who offered a price which the seller accepted. That is all. When taken in isolation, a high clearance rate does not suggest that prices are rising or falling. It does not suggest that the seller received a good or a bad price. It simply tells us what percentage of sellers accepted a bid on the day. More often than not, it means that a buyer met their reserve price.

But the reserve price is simply the lowest price that a seller is prepared to accept to sell their property. It is most unlikely to ever be the highest price that the winning bidder was prepared to pay in order to secure the property. In a falling market, buyers will be reluctant to meet the seller’s reserve price, which causes the auction clearance rate to drop. This is why a low clearance rate is viewed as an indicator of a soft or falling market. If the market is rising, buyers will happily pay the seller’s reserve price and more if that’s what is required to be the highest bidder. High clearance rates and stories of properties selling above the reserve price are all symptoms of a rising market. If all auction campaigns were reported, the auction clearance rate would have a place as a market indicator but it should still not be the ‘prime’ market indicator.

When agents forget to report failed auction campaigns in order to artificially bump up the clearance rate, there is even less of a reason to see that rate as an accurate bellwether. Here is a little secret a real estate industry bent on public auctions tends to brush under the carpet: The number of properties selling by auction as opposed to private treaty is under 20 percent of all sales nationally. The percentage is slightly higher when considering capital cities only. So using this process of sale as a prime indicator of the market’s health or lack thereof is an obvious mistake.

It is better to invest the time and energy to get the facts right rather than be misled by industry hype relying on one market indicator. In order to accurately gauge current market conditions on a local level at any one time, attend open inspections and auctions to see what is really happening.

Although it’s time consuming, the closer you look at what stock is on the market and its subsequent sales results, the better indication you will have about what the current market conditions really are. Relying solely on property soothsayers drawing conclusions from an inaccurate market indicator is better left to the uninformed.

Will real estate agents meet their Uber?

Fairly or unfairly, many consumers would be happy to see the demise of real estate agents. And there are no shortage of people trying to make it happen. Uber has decimated the taxi industry on a global scale.

As a result, every industry is looking over it’s shoulder in fear of the one concept or idea that could Uber-ise them. Digital disruption will impact on the real estate industry in the near future. Whether it is a total game changer that diminishes or devalues the agent’s role remains to be seen.

Respected Financial Review real estate journalist Robert Harley recently wrote ‘In New York, technology experts agreed the global property industry will soon see a rush of fixed-price, no commission and highly automated peer to peer websites.’ Harley was reporting on a real estate technology conference where digital disruption is high on the agenda.

The stakes are high, so are the rewards for those that get it right when it comes to digital disruption. In the mid 1990s, did not exist. Today it is a $7 billion company. Fairfax recently released their half year results. Domain the real estate website is essentially propping up the parent company.

The Internet has made it easier for buyers and sellers to engage directly than ever before. The majority of attempts to Uber-ise real estate have been companies encouraging and coaching vendors to go on the market as private sellers, avoiding agents commission.

Buy My Place is the largest company in this space. Their slogan of ‘No Commission, Lots of Help!’ pretty well sums up the offering. Buy My Place plan to list on the stock exchange in the near future, it’s fair to say they are not going away. Good news for consumers, may be not for agents.

Many of the people featured in video testimonials on the Buy My Place website are classed as ‘successful sellers’. This is an interesting description in that it is undefined what a ‘successful seller’ is and should be. Just like real estate agents, Buy My Place is classing someone that ‘sells’ as having made a ‘successful sale’.

This is the same as agents that spruik the importance of ‘clearance rates’ without any regard for the quality of the price achieved.

Teena and Andrew Hubbard sold their home using Buy My Place. They were interviewed by Harley and quoted as saying ‘we have no idea why people would sell with an agent’. The Hubbard’s have sold twice without using an agent, so their assessment of estate agent’s will be confronting for the industry that has felt indispensable for so long.

Real estate agents have had people believe that high clearance rates are the key to a good agent. Now the disrupters threaten to put sellers and buyers in direct contact, sellers can achieve their own high clearance rates without paying an agent’s hefty commission.

If the real estate agent is not going to be ‘Uber-ised’ they are going to have to focus on getting ‘high prices’ for their clients not high clearance rates for themselves.