Why Auction Clearance Rates are So Important to Watch in Melbourne

The media, agents, and real estate bodies such as the REIV and others seam to be obsessed with Auction % Clearance Rates. Every week, it’s “X% success from Y auctions”, and “This week’s A% clearance rate is B% higher than last week/month/year”. It all gets pretty tedious. But, maybe there’s a reason for so many professionals to focus so intently on auction trends…

Auction Clearance Rates Indicate the Health of the Market

Brunswick is a suburb in Melbourne’s north that is, in many ways, representative of the broader Melbourne market. For the purposes of explaining the relationship between Auction Clearance Rates and Median $ Price Growth, we’ve looked at the sales history of Brunswick Houses since the turn of the century.

Over the last 17 years, Auction Clearance Rates for Brunswick Houses have averaged just under 79%. Median $ House Prices have increased in every year but one (in 2011). See from the graph below that auctions and prices are very tightly correlated… When Auction Clearance Rates are below average or declining, Year-on-Year (YoY) Median $ Price Growth is below average (9%) or trending downwards. A simple way of explaining the stats: 72% of the time, auctions and prices are moving in the same direction.

 

This insight should be of no surprise to those who understand how auctions work. Vendors determine the reserve price, effectively saying “I’m willing to sell at this price”. The reserve price is arrived at by assessing market conditions, nearby comparable sales, and buyer interest over the course of the campaign; if the proper analyses and professional advice is applied, the reserve price should be a reasonable estimation of market value. So, if bidding at auction exceeds the reserve price, then a new, more accurate market value is achieved.

Auction Sales Lead to Higher Median $ Prices

Put enough sale prices together, and you get the Median $ Price of an area. When lots of properties are sold successfully at auction, with competitive bidding, then Median $ Prices should rise. The underbidders for each property will move onto other properties, and their assessment of market values will change based on recent results. High Auction Clearance Rates effectively act to stimulate the market, by increasing vendor and buyer expectations. The opposite occurs with less auction success.

The Market Tends to Cool When More Properties Pass In

If only one or two parties are seriously interested in purchasing a property, then that auction rarely gets off the ground. In this scenario, when, after a 6-8 week process, the vendor’s reserve price isn’t met, he/she has some serious decisions to make: 1) negotiate immediately with interested parties, 2) move into a private sale campaign with a fixed price, or 3) pull it from the market entirely.

For options 1 and 2, the vendor has lost the leverage, and prospective buyers are more likely to assess the property logically, with far less emotion clouding their offers – the ultimate sale price will almost certainly be below the initial reserve (read this article for more on post-auction discounting). If the vendor chooses option 3, and delists the property, then a clear message has been sent to the market that sale price expectations were to high; whether consciously or not, active buyers will take that message on board, and will proceed with more caution when considering other properties.

 

This graph illustrates the relationship between Median $ Price Growth and Auction Clearance Rates in a slightly different way. Each dot point represents a year in the Brunswick House Market. Those dots to the right of the middle line are years where the Median $ Price Growth was above the long-term average of 9%. Those dots above the middle line are years where the Auction Clearance Rates were above the long-term average.

Overwhelmingly, Prices Grow Most When Auction Clearance Rates Are High

Notice that for nearly all of the years where prices were rising more than usual (to the right of middle line), auction clearance rates were above average (above middle line). Conversely, in nearly all of the years where prices were rising less than usual, auction clearance rates were lower than average.

We’re nearly half way through 2017. In Brunswick, we’ve seen prices increase dramatically with auction clearance rates at about average. Across Melbourne, auction clearance rates have consistently been in the high 70s; importantly, they’ve been much higher than the same periods last year, which suggests strong demand from multiple bidders. We’re yet to see a turn in that trend, but as the above analyses proves, it’s important to keep monitoring. Understanding Auction Clearance Rates can help you get on the front foot with emerging trends.

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