Falling Auction Rates: What Does It Mean?

November 16th, 2018 - by Brad Gillespie

Auction clearance rates are watched avidly by property analysts, the media, buyers and sellers alike.

But what do falling rates really tell us about the current state of the market?

Auction clearance rates are a key measure used to understand the volatility of the property market and gauge buyer demand. Clearance rates of between 60 to 70 per cent are thought to indicate steady demand; rates over 70 per cent indicate prices are being driven up by high demand, making it a seller’s market; and anything below 60 per cent is generally considered a sign that the market is slowing down.

Currently, data from domain.com.au, CoreLogic and realestate.com.au show Sydney’s auction clearance rates to be hovering below 50 percent – down around 20 per cent from this time last year – including in Sydney’s inner-city areas such as Erskineville and Alexandria.

According to CoreLogic’s October 2018 report, metrics have generally softened, with the number of days to sell a property and vendor discounting rates trending higher, while auction clearance rates are tracking lower. Clearance rates have actually steadied in recent weeks but remain well below levels from a year ago.

Why auction clearance rates are falling

A number of factors can help explain why fewer properties are selling at auction. Besides the fact that clearance rates typically fall in winter, our current environment of tighter lending standards – following the Banking Royal Commission findings – is deterring buyers. This, in turn, is making sellers cautious, with new listings at their lowest levels in the half-decade.

How are auction clearance rates calculated?

Auction clearance rates are the proportion of properties successful sold at auction or prior to auction. They’re represented as a percentage that is arrived at by dividing total auction sales by the total number of auctions held in a given period, which includes properties that end up being withdrawn from the market. However, real estate industry analysts have different ways of calculating rates.

What do clearance rates tell us?

Auction clearance rates have historically been a good indicator of movements in capital city dwelling prices. Because rates are calculated weekly, they provide a regular read of current market sentiment. However, as weekly clearance rates can fluctuate a lot, it’s generally better to look at monthly and seasonal trends.

What clearance rates don’t tell us

While they’re a good barometer of the market, particularly in metropolitan areas, auction clearance rates don’t always tell the whole story.

In recent years, the Sydney market has been highly competitive, which meant that auctions proved a popular way of selling, as they work best in markets where there is high demand.

However, auctions actually represent a small percentage of total property transactions, even in capital cities, which means that properties going to auction may not represent the Australian property market as a whole.

In the past 20 years, an average of just 7.7 per cent of sales has been at auction versus private treaty. In the year to June 2018, Domain recorded 59,548 out of 484,486 total sales as auctions. You can read more in our article on the difference between selling at auction versus private treaty. Seasonality also plays a role in auction clearance rates, with the market typically cooling in winter and picking up during the warmer months.

Properties routinely sell post-auction

What the figures from the published clearance rates don’t show is that right now we are seeing a very high percentage of properties selling directly after an auction, or within 2 weeks of the auction date. So a property may be marked as “passed in” but still end up selling in a post-auction negotiation. Factors contributing to this trend include the tougher lending environment and longer pre-approval time frames. Buyers are also holding off a little on auction day due to confusion over the state of the market or value of properties. But properties are still selling by auction, even if the deals are taking a little longer to negotiate and occur after auction day itself.

What do buyers and sellers need to know?

It’s a good time to be a buyer in the market, with prices having dropped somewhat and reduced competition. For sellers, while the conditions are less favourable than they once were, if you have a good property in a desirable location, you’re still in a strong position. Many agents believe the market will rebound following a reset in vendor expectations and increased confidence in the market should interest rates remain low.

Contact me today if you’d like more advice on the current state of the market.