Explainer: Why auction clearance rates matter

It is the weekly statistic watched closely by property analysts and media as well as Australia’s nervous buyers and sellers. But what does it mean? And more importantly, does it actually matter?

What are auction clearance rates?

The Domain auction clearance rate is the portion of properties successfully sold at an auction, or prior to an auction. It is represented as a percentage.

The percentage is found by dividing the aforementioned auction sales by the total number of auctions that were to be held in a period, including those that ended up being withdrawn.

The clearance rate tells us which way prices are going

The auction clearance rate coincides with movements in capital city dwelling prices. Figure 1 shows the rolling annual clearance rate (Australia wide) alongside annual growth in the Domain median dwelling price.

Annual movements in the two indicators are highly aligned over the past 20 years, and are strongly correlated.

Figure 1 demonstrates the strong correlation in movements between the two time series. In the year to September, the clearance rate declined from 58.1 per cent to 53.8 per cent, suggesting a further decline can be expected in the September median values.

The main benefit of the auction clearance rate is that it is high frequency. As well as tracking the annual clearance rate, a weekly figure can be reported, providing a regular read of market sentiment.

However it is worth noting the weekly statistic will have higher fluctuations.

The clearance rate indicates a buyers’ market or a sellers’ market

Like consumer or business confidence indicators, the auction clearance rate is used to understand buyer appetite – specifically for the housing market.

Steady demand in the property market is generally regarded as a clearance between 60 per cent and 70 per cent. Any lower than 60 per cent and it is thought the market is slowing down.

This suggests the auction space is increasingly becoming a buyers’ market.  Anything above 70 per cent suggests prices are being driven up by high demand, which means the market is tipping in favour of sellers.

The limitation of clearance rates

Despite being useful for metropolitan markets, the auction clearance rate is not a comprehensive enough indicator to judge demand in the entire property market.

In the past 20 years, an average of just 7.7 per cent of sales have been at auction versus private treaty. In the year to June 2018, Domain recorded 59,548 out of 484,486 total sales as auctions.

That should be a sizeable sample to judge the property market, but the properties going to auction are not randomly selected.

In fact, there are many factors which differentiate the properties that go to auction, versus those that are sold by private treaty. These include location, price point and the individual building characteristics. 

This means that the properties going to auction may not represent the Australian housing market.

While the auction market is not a completely randomised sample of sales in the property market, that does not mean it has no use for different markets. Academic literature around the auction clearance rate records anecdotes of agents in regional markets even using the clearance rate as a lead indicator for local market performance.

Domain data indicates that while this “lead lag” relationship seems to be present around the early 2000’s, when the portion of recorded regional properties at auction was relatively low. However, the clearance rate appears to have become more closely correlated with regional price growth over time.

The popularity of auctions is rising over time

Despite the limitations of the auction clearance rate, the sale method appears to be increasingly popular over time. 

Generally, the portion of properties sold in an auction setting increases after prices begin to rise, and decreases when prices start to fall.

However, the long-term shows more properties are being sold at auction regardless of price movement. Figure 3 shows the portion of properties sold at auction over a 20 year period.

While the 20 year average of properties sold at auction is 7.7 per cent, the average moved up to 9.4 per cent in the past 10 years. This reinforces that auction sales as a portion of the total market are increasing over time.

With the popularity of auction sales rising, the clearance rate could become increasingly relevant those in markets that are traditionally not represented at auction.