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.