The auction clearance rate is the most commonly quoted indicator on the performance of the real estate market. Simplistically, if the clearance is high, the market is doing okay. If the clearance rate is low, say below 50%, the market is in trouble.
Prior to looking at the accuracy of the auction clearance rate as a market guide, it’s worth looking at how and why the clearance rate has become the indicator of choice, over all others.
Getting reliable and accurate data on the real estate market is near impossible. Unlike the stock market which is dynamic and real time in the manner it reflects price, the reporting of results in real estate is cumbersome and slow. There is no centralised point or organization where all sales results are collated, to offer accurate and insightful perspective on how the market is performing, at that point in time.
Sales results are only publicly available upon settlement of the sale. The actual exchange of contracts could have happened 3 or 4 months prior to the result being reported. The only way to have total clarity in the real estate market is if it were compulsory for every transaction to be reported at the time of sale, to a centralised reporting point.
The market could then be assessed in real time. A good idea in theory. But the desire for accuracy in the market clashes with an individuals right to privacy and anonymity in regards to their personal affairs. Therefore the auction clearance rate is used as key market indicator of the real estate market, first and foremost because it is in real time.
The weekend auction results are collated from across the city on Saturday night and carried by the media in the Sunday press. Pundits stroke their chin drawing conclusions on what can be read into the weeks auction results. Economists, market watchers, the media at large and consumers draw sweeping comments and conclusions.
So what does the auction clearance rate really tell us each week?
It informs as to the percentage of buyers that have offered a price that the seller found acceptable. In isolation, a high clearance rate does not suggest that prices are rising or falling. It does not suggest that the seller got a good or a bad price, it simply tells you what percentage of sellers got an acceptable price – a buyer that met their reserve price.
If the market is falling, buyers will be reluctant to meet the seller’s reserve price, causing the auction clearance rate to drop. This is why a low clearance rate is loosely seen as an indicator of a soft or falling market. If the market is rising, buyers will happily pay the seller’s reserve and more if that is what’s 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. Given the reserve price is the sellers bottom line and is set by the seller, it can be a mistake to over analyse the auction clearance rate as a key market indicator. Certainly, if all auction campaigns were reported, the auction clearance rate has a place as a market indicator.
The waters of accuracy are muddied though when agents fail to report failed auction campaigns in order to bump up the clearance rate. To further illustrate why the auction clearance rate is a poor market indicator of the real estate market, you only need to look at the number of properties that sell by negotiation as opposed to public auction.
In most areas, the number of auction sales represents about 30% of all transactions. This is a statistical fact, not a personal opinion. It is a little secret the real estate industry tends to brush under the carpet.
As either a buyer or a seller, to accurately gauge the market conditions, on a local level, attend inspections and auctions to see for yourself what is really happening in the market. It is time consuming, but the more closely you follow the stock on market and subsequent sales results, the better read you will have on the current market conditions. It is better to invest the time and energy getting the facts rather than being potentially misled by industry spin.