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Auction Clearance Rates – How to Understand it Better

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It’s apparent that media relies falsely on auction clearance rates as a gauge of the overall shape of the real estate industry. Even reporters seem to view them as the foremost tool to measure assessment of our market conditions. You may ask why is this so? The Reserve Bank is just as curious and quite hooked in the weekly statements regarding these clearance rates.

Sadly, the numbers are infamously unprincipled, if not phony. These data really do not inform us anything valuable on the immensely popular areas in the country, even in the two biggest cities- Sydney and Melbourne where these auctions are rampant. They present just a glimpse of the reduced portions of the total market. To say that it is a bit of a defective strategy is such an understatement.

The truth of the matter is that Sydney and Melbourne have the biggest auctions which are not noticeable in other locations. But take heart, even in these two major cities – the emphasis is on the stature end of the market. This means it does not truly advise us on what the bigger picture is out there. That’s not fair though.

For many years, we’ve been hearing of a “national or nationwide property boom” which never happened at all. Then, a couple of years after, we’ve looked at “national market downturn” which also didn’t happen ever. Surprised? The media is giving extensive and elaborate news on the country’s “property market revival” focused on Sydney and Melbourne, too.

Most of the key cities, and largely the rest of the country are not recovering precisely for the reason that they didn’t experience a big downturn to begin with.

Take note also that the huge majority of the population or about 16 million Aussies – do not reside in either Melbourne or Sydney.

It’s clear that the largest issue with clearance rates is that they’re the most awful kind of dubious information. Clearance rate statistics are overflowing with false stories claiming to be factual. This includes mostly sales which did not happen under the hammer at auction and allegedly declared as auction sales. Add to this is the truth that the agents are usually more inclined to account for the successful auction results vs. those which are not.

Previous studies done regarding clearance rates indicated that the published numbers are often much higher than the real ones since most of the unsuccessful auctions were not declared or reported. The approximate true clearance rate was generally 12 to 15 percentage lesser than what the media alleges.

What do you need to know about auction clearance rates? How you can make use of them?

Normally, an average customer would believe that soaring auction clearance rates imply a resilient, flexible property market described as demand and growth exceeding the supply. This notion also might scare the first-time home purchasers!

It is estimated that one-third of the total Australian residential property market have been bought and sold through auctions – This explains why ‘clearance rates’ is a significant market indicator.

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But then, it’s worth pondering: Do clearance rates really prove to be an accurate indicator of the property market situation? Or maybe it is more of being utilized as a marketing scheme by developers, agents, and other groups which benefit from the statistics they circulate? Our goal is not to smear publicly anyone or a body of industry in particular promoting such statistics. Our aim is to provide you a more accurate understanding of clearance rates – what they really mean and how are they calculated.

As Mark Twain’s famous quote says, “There are lies, there are damn lies and then there are statistics.” This could not be more apt than now when we talk of this hot topic of the hour.

Calculating the Auction Clearance Rates

What is surprising though is that each of the sources present quite a different system of calculations (so the clearance rate for RP Data is not the same for APM, for instance…).

Below is one illustration where a computation for clearance rate is provided by a popular body in the industry:

Clearance Rate is EQUAL to:

Properties sold before the auction + Properties sold under the hammer
Divided by
All Properties Passed in + Properties Withdrawn + Properties Sold

Let’s have a short rundown of all the terms which are rather easy:

  • Sold under the hammer – This is what happens when a sale is made in an auction.
  • Sold prior to auction – If a buyer provides an offer; vendor takes it before the auction.
  • Passed in – There are ZERO bids received greater than the vendor’s reserve price.
  • Sold after auction – This is self-explanatory.
  • Withdrawn – No auction happened for one or several reasons and the seller might have changed his mind.

Are you having a clear scenario of all these now? Or do you feel like going back to school to understand everything better? We know – we feel pretty much the same way, too. We’re just showing you how a single industry body computes for the clearance rates at this point.

But the general buyer may really make things easier with this thought:

Number of Properties Sold
Divided By
Number of Auctions Taken
Then….
Multiply 100/1

So, you have a somewhat straightforward percentage! As you can see, it is rather challenging!

It would be simpler if all groups are using one formula and reports of these media agencies have the same statistics. But the question is this: Which organizations will revise their own formula? Will that make other groups seem outdated? What we recognize is the fact that one should exercise caution on the advertised clearance rates – it should serve as a guide only, certainly not a real indicator of the actual auction clearance sales as well as market performance.

What does the public understand about auction clearance rate?

The regular property buyer will presume that the clearance rate would mean the quantity of properties sold under auction settings on any particular weekend. But think about what happened if there were about 200 scheduled auctions but only 100 auctions were declared. Plus, 50 properties were actually sold – what then should we treat as the clearance rate in this situation? Food for thought.

What’s the total number of auctions truly happening on a certain weekend?

A seemingly easy question for you, right? But unfortunately, it’s not. While reading most publications over the weekend, we’ve found 3 different records for the number of auctions held in that weekend. Why were there 3 different numbers for counting same auction in the same weekend? The answer could be down below — read on.

What NOW – the real vs. reported clearance rate?

So, this is where it gets to be interesting. When you say there are “X” number of properties placed for auction and only “Y” number of properties actually were up for sale, what do we do now?

There is the popular saying that “garbage in, garbage out” or its several forms of parallelism. What it implies is that we all seem to be under the control of the people essentially reporting the facts or in some instances, numbers that are not being reported at all? Most data are real-time facts and with most auctions held usually on a weekend – is the majority of data being reported?

Why does it seem normal that clearance rates wane throughout the week when more results are being reported? This suggests that the preliminary results were innately skewed. It also reinforces the impression that real estate agents and other parties are certainly predisposed to state only the sold properties, instead of including as well those which weren’t sold in the process.

Since most auction results are not documented, should it be that so much credibility be placed over these calculated clearance rates? At present, these clearance rates are used not only by home vendors and buyers but are also strongly recommended by banks’ analysts, the media and the Reserve Bank.

So, for us to be able to check and analyse major property markets where clearance rates are a part of, we need to combine it smartly with other data. Regrettably, using clearance rates as your sole data is NOT really useful so be very mindful of this!

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