Judging property market conditions: What is an auction clearance rate?

With coronavirus and Australia in a recession, understanding auction clearance rates and other indicators can help you become better prepared at a time of uncertainty in the property market.

Auction clearance rates have been just one of the property market indicators influenced by pandemic lockdown conditions in 2020. Clearance rates experienced a downturn when on-site auctions and property inspections were paused at various periods and locations, including Melbourne most recently, to help curb the spread of the coronavirus outbreak.

According to CoreLogic, clearance rates have tracked lower than average since early July due to a substantial rise in withdrawn auctions in Melbourne which has been hit by a second wave of the virus. The property analysts said with consumer sentiment also falling, it implied home buyers and sellers may retreat to the sidelines.

But what does a downturn in auction clearance rates mean, and how could it inform the decision of a prospective buyer at a property auction? Let’s take a look.

What is an auction clearance rate?

An auction clearance rate is an indicator of the condition of the current property market, particularly those which go to auction. The rate is expressed as a percentage of auctions that led to a successful property sale, and can be used to help establish whether the market is in favour of buying or selling property.

A clearance rate of around 80% is generally considered ‘high’ and could indicate that buyer demand for purchasing property is higher than what is currently available on the market. This rate is considered a ‘hot market’ for those looking to sell.

On the other hand, a low clearance rate around the 60% mark or below suggests buyer interest at auctions is low and house prices are in decline. This market climate is seen as favourable for those wanting to buy.

Figures released from CoreLogic on 10 August showed 65.9% of the 1,160 homes scheduled for auction the week prior across the capital cities were sold. To provide some perspective, the three months to June saw auction clearance rates across the combined capital cities plummet from 62.5% in the March quarter to 47.9%, which was the lowest level since December 2018. The clearance rate began to improve somewhat in June once onsite auction restrictions were eased.

How are auction clearance rates calculated?

The auction clearance rate indicates the percentage of properties sold at auction for each week or month and is calculated based on the auction results per state or city. The calculation is generally the number of properties sold divided by the number of auctions held or properties listed for auction. The number of properties ‘sold’ may also take into account those which were sold before or after the auction when calculating the rate, although this can depend on the real estate body calculating the clearance rate.

Traditionally, the clearance rate data is calculated on a Saturday evening, so that the results directly reflect the outcomes of the day and can be published in Sunday newspapers and publications; however, postponed auctions or withdrawn properties may affect the calculations. For example, some real estate bodies may include properties sold a day or two after the auction in the clearance rate, but classify any sales after that as private, rather than sold under auction conditions. Others may release a preliminary clearance rate on Saturday evening with as many results as possible from the day, before finalising the rate a few days later. This means auction clearance rates may vary, depending on the real estate body.

What can affect the auction clearance rate?

The main point of difference between varying auction clearance rates for the same time period is the calculation method and data used by the individual real estate body, particularly what results are classified as ‘sold’ and the total number of auctions. Auctions can be unpredictable and some possible outcomes, other than sold under the hammer, are:

  • The property is sold before the auction
  • The property is passed in at auction, but sold in negotiations soon after
  • The property remains unsold after the auction
  • The property is withdrawn from auction
  • The auction is postponed until a later date

Other external factors which may affect clearance rates include current interest rates, the availability of credit and the location of the auction and the property, including whether there are a number of competing auctions on the same day. Sporting events, religious holidays and the weather may also influence the rate.

The coronavirus lockdowns, for example, have had a part to play in reduced auction clearance rates in Melbourne. The number of homes listed for auction in Melbourne dropped sharply recently due to the latest lockdown, according to CoreLogic, but withdrawal rates have not been as bad this time around (18% in the week ending 9 August) compared to the previous lockdown period in April and early May (65% peak in the second week of April). Last week saw a clearance rate of 55.1% in Melbourne compared to 72.3% during the same period last year.

What is a buyer’s market and what is a seller’s market?

A buyer’s market typically means that there are more homes on the market than there are buyers, slowing the increase in sale prices and potentially causing prices to fall. A buyer’s market generally also means that houses are spending a longer time on the market than usual, which reduces the urgency to buy.

A seller’s market, on the other hand, means the number of people looking to buy outweighs the number of properties on the market. This means that houses generally sell faster, prices remain stable or increase and there is greater urgency and a higher demand among buyers.

A balanced market indicates that the buyer demand is roughly equal to the number of homes available on the market.

What are some other property market indicators to keep an eye on?

If you’re hoping to get a good grasp of the property market before you buy or sell, you may want to look further than the auction clearance rate. Some other key indicators to look out for are:

  • Property values in the area you’re looking to buy, particularly any trends over the medium and longer terms
  • Days on market (DOM) which indicates how long properties are listed for, with a lower DOM often meaning a more active property market
  • Rental yields may help to give you an idea of how much income or rent a property could earn, potentially helping with loan repayments
  • Vacancy rates can also give you an idea of rental activity. High vacancy rates, for example, may mean that you have trouble finding a tenant if you’re planning on renting out the property.

Interested in learning more about property? You might also like the following reads:

Image source: King Ropes Access, Shutterstock.

This article was reviewed by our Senior Finance Journalist Ellie McLachlan and Sub-editor Tom Letts before it was published as part of our fact-checking process.

 

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