With property prices falling, the typical focus on weekly auction results – a Sunday isn’t complete for many observers without checking the weekend clearance rate – has only intensified.
One of the appeals of tracking clearance rates in Sydney and Melbourne – the biggest auction markets – has been the relatively tight relationship with price growth. Generally speaking, clearance rates above 65 per cent were typically associated with solid gains, and over 75 per cent with outright strength, while rates below the 50-55 per cent range were associated with price declines.
That broad relationship still holds.
However, clearance rates do not seem to be capturing the full extent of price weakness during the current correction. The lows seen late last year, in the 45-50 per cent range, are comparable to those in 2011-12 and previous cycles, yet the pace of price declines has been somewhat faster.
But it’s increasingly important to apply a few adjustments to get the right take from these figures – whether a result really is strong, weak or indifferent.
Firstly, early results skew high. Unsurprisingly, successful auctions tend to get reported earlier. Patterns depend according to data provider but for CoreLogic, preliminary results are published on the Sunday then a final estimate on the following Thursday.
The difference in terms of clearance rates is on average 3pts for Sydney and 1pt for Melbourne. However, the weaker market over the last 18 months has seen more slippage than usual, averaging closer to 5.5pts for Sydney and 1.5pts for Melbourne.
So, step one, for preliminary clearance rates deduct 5.5pts for Sydney and 1.5pts for Melbourne.
The time of year also matters.
Buyers and sellers come and go from the market at slightly different times, producing a regular ebb and flow to clearance rates as the balance of power shifts. For March this effect is worth about 2pts in Sydney, slightly more in Melbourne. Seasonality diminishes gradually heading into winter, re-emerges in spring and then turns sharply negative as buyers disappear over the summer holiday period.
So, step two, take another 2pts off for seasonality (tweaking this as the year progresses).
Another aspect of the auction results – pre-auction withdrawals – may shed more light on this and provide a way of refining the measure to give a better gauge of price conditions. Historically, around one in eight properties heading to auction in Sydney has been withdrawn prior, with a much lower share – one in 30 – in Melbourne. Both have risen materially over the last year, and much more sharply than during previous downturns. In Sydney, it has been more than one in five and in Melbourne it has been about one in every 15.
Pre-auction withdrawals are part of the “uncleared” portion of the clearance rate.
However, they are likely a good indicator of a more stressed market. Whereas a passed in result may be due to bidders not taking the price above reserve, a withdrawal points to sellers assessing that there will be insufficient bidders to even justify an auction.
Bringing it all together, Sydney’s preliminary clearance rate in the last week of March was 62.2 per cent – knocking 5.5pts off for early result bias, 2pts of for seasonality, and adding back 3pts for the withdrawal gap (11 per cent vs avg 14 per cent) gives an adjusted estimate of 57.7 per cent, a significant improvement on the very weak reads late last year. The same adjustment for Melbourne takes a preliminary 57 per cent clearance rate down to 52 per cent.
Interestingly, in Sydney and Melbourne the main shift in early 2019 looks to be coming from a reduced rate of withdrawals rather than a lift in clearances. That may be an early sign that the pace of price declines is moderating. However, both shifts will need to be sustained and extended before auction market results are consistent with price stabilisation.
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