Days on market, clearance rate data can deceive or deliver for investors
Property investors can learn much about the market from metrics such as the time it takes a property to sell and local auction clearance rates but they can also be deceptive if not used appropriately.
After the weekend real estate auctions, we often hear media and real estate sales agents spruiking clearance rates in the capital cities.
This is because in the dynamic landscape of the Australian real estate markets, metrics such as clearance rates and days on market serve as vital indicators, offering insights into the health and trajectory of property markets.
Property investors should educate themselves and be aware of these metrics when buying in any market but take caution as these metrics can be unreliable.
Clearance rates versus days on market
Clearance rates refer to the percentage of properties sold at auction within a specified period, while days on market signify the average number of days it takes for a property to sell - measured from the date the property was first listed for sale to the date the property went under contract.
These metrics not only reflect market sentiment and demand but can exert significant influence on property prices when buyers start to feel FOMO (fear of missing out) when days on market are short (meaning properties are selling very quickly), or clearance rates are high (meaning properties are selling at auction).
This influence over buyer sentiment can be highly unfounded and give a false indication of the state of the overall market.
Year-on-year comparison of clearance rates
As of May 2024, property markets across Australia continue to display resilience and a promising environment for investors, albeit with some variations across major cities.
In Sydney the clearance rates have remained robust, hovering around 75 per cent, which can indicate growing demand.
This compares to April 2023 when the clearance rates were slightly lower at 72 per cent, meaning more properties are likely to sell at auction this year than last year.
Melbourne has seen a slight decline in clearance rates from 69 per cent in April 2023 to 67 per cent in April 2024.
This marginal dip might suggest a slight cooling in buyer activity, or perhaps it’s because sales agents are putting more properties to sale by auction.
In Brisbane and Perth, clearance rates have remained relatively stable, with Brisbane maintaining around 65 per cent and Perth hovering around 60 per cent. This could indicate steady demand and market activity, however, with so few auctions in Perth, this metric would likely mislead the uninformed investor.
Not an indication of property market overall
Investors should treat these metrics with caution.
While it is important to understand their meaning, they must be taken with a grain of salt. These numbers are only relevant if considered alongside the overall state of the market.
For example, when a market is cool there will be fewer properties going to auction, meaning that if there is only one property going to auction on the weekend and it happens to sell at auction then the clearance rate for that weekend will be 100 per cent. This is common in Tasmania and the Northern Territory.
The clearance rates metrics are significantly swayed by the number of properties for sale by auction.
Another reason clearance rates do not give an overall picture of a property market’s health is because there is a whole other underlying property market.
There are properties that sell very quickly but are only for sale off-market and are never listed as for sale.
This is often the case in the more premium markets where properties are exclusively offered first to premium buyers as well as buyers’ agents who might have clients who can quickly snap these properties up before they are offered to the general public for sale.
Therefore, clearance rates will never give us an overall picture on the strength of the property markets.
Days on market can be manipulated
On the other hand, days on market will offer insights into the efficiency of the market and the pace at which properties are being transacted.
A shorter average time on market suggests strong buyer interest and efficient sales processes, which could contribute to price appreciation. Conversely, a longer time on market may indicate sluggish demand or pricing issues, potentially putting downward pressure on property prices.
Suburbs that are more popular will have lower days on market.
This metric reflects the popularity and demand in the market but can also be misleading because if a property does not sell after six weeks the seller can change sales agents and start a new campaign and the days on market will often reset.
In this way, some properties that are stale on the market might have gone through a few different real estate agents over a year long period and eventually sell but only show a short ‘days on market’ based on the last date it was listed for sale.
Don’t be misled by this metric. The best way to get an indication of demand is to follow the level of supply, be on the ground to see how many people are going to the open house inspections, speak to the agents, and keep on top of new listings to notice if a property has been listed previously.
The days on market metric can also be highly skewed over the Christmas and new year period, where properties are listed prior to the December shut down when real estate agencies close and re-open mid-late January meaning that the property has sometimes already hit 30 days plus before it has had its first open inspection.
Property investor tools
Albeit misleading on some levels, these metrics can still provide property investors valuable insight into the level of competition, buyer sentiment and pricing trends, enabling investors to gauge market activity and level of risk associated when weighing up various investment options.
High clearance rates coupled with shorter days on market in a particular area may signify strong demand and limited supply, presenting opportunities for investors to capitalise on potential capital appreciation.
Conversely, low clearance rates and prolonged days on market may indicate oversupply or weak demand, prompting investors to exercise caution and conduct thorough due diligence before committing to investments.
Looking at the overall market metrics, and monitoring trends allows investors to identify emerging opportunities and anticipate market shifts. It is important to stay abreast of the trends and market metrics as an investor to be able to adapt your purchase strategy accordingly, but these alone cannot show you the full picture of the market.
