Auction Clearance Rates

November 13, 2015

 

Auction clearance rates and stock on market have been getting a lot of attention from the media as of recently. What is the relevance of these two figures and what are the current values.

 

First lets remember that any one bit of data should not be taken as the entire reason for making a decision. Before investors jump into (or out of) an investment they should seek out a full picture view. The clearance rates are one piece of the puzzle and give us some insight but they do not paint a full picture.

 

Auction clearance rates can give us an idea of what is happening with consumer confidence in a market. It gives a percentage of all properties that go to auction that actually sell. There are plenty of variables at play such as how greedy vendors are in their sale price expectations, what is happening in the financial environment (lending), the total number of properties on the market and many other macro fundamentals. Still, this data can help us get an idea of what a market looks like while keeping emotion out of our decision making process.

 

This graph from CoreLogic RP Data shows the trend of clearance rates around the country.

 

When monitoring these values it is important to watch for trends. If there is a clear trend of clearance rates decreasing or stock on market increasing there may be reason for concern but other considerations should be reviewed as well. 

 

Some very important things that need to be taken into consideration are the basic fundamentals of the market place as well as the lending environments.

 

It is very interesting to note just how seriously Australians take their holiday season. You can see that year on year the total properties on the market drop off to nearly zero every year around December. It would appear that if you are trying to sell a property around this period you may not have a very happy new year.

 

It is interesting to see the correlation between dropping cash rate (graph from CoreLogc RP Data) and increased auction clearance rate across the country. It is clear that the lending environment has a considerable influence on consumer confidence and consumer confidence directly affects the clearance rate. The tightening lending restriction (and recent increase in mortgage rates from some lenders) has slowed down the auction clearance rates in the combined capital cities.

 

What about city by city? Both Melbourne and Sydney have trended along with the national average. This is primarily because they are responsible for nearly all of the quantity of total sales by auction - the auction form of sale is very widely used in these capital cities. Both have seen an increased number of stock on market as well as a reduced clearance rate. This is evidence that APRA’s plan of slowing down the market is appearing to have an affect. The high percentage of investors that had been inflating the markets has been dampened and the markets appear to be correcting accordingly.

 

In both Brisbane and Adelaide the sale by auction strategy is not commonly used, with private treaty being far more preferred.

 

What is the most basic fundamental that investors should determine in order to choose a market place with strong potential for capital growth? What fundamental is the basic economic principle for trade? The answer is of course: Supply vs. Demand.

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