Overreliance on auction data could undermine an investment strategy

Spring is known as the selling season in Australian real estate, and this is the time of the year where we get excited at seeing properties being fought over at auction.

We’re seeing SOLD slapped across notice boards and the evening news using auction clearance rates as a primary indicator of Australia’s property market health, but relying on these rates to assess market activity can be misleading.

Auction clearance rates are not entirely negligible. While they can reflect certain trends, clearance rates are not comprehensive indicators of market conditions, and they don’t capture the complexity of market activity or the broader economic factors impacting real estate.

Auction data omissions

A key limitation is that these statistics only represent a small portion of property sales.

Auctions are predominantly used in Sydney and Melbourne, whereas other states favour private treaty sales.

Auctions aren’t a reflection of the market; they are realistically only a sales tactic.

It’s important to remember that not all properties are suitable for auction, for example luxury properties will not typically be sold via an auction campaign because there are only particular buyers for these types of properties.

They often are not even listed for sale and are instead offered off-market through buyers agents to prospective buyers.

Supply will impact auction clearance rates

The varying supply of properties available for sale will give a false perception of demand and auction clearance statistics.

Consider this, if there is one property going for sale via an auction campaign and it sells, then the auction clearance rate is 100 per cent.

If, however, the following weekend there are 100 properties selling via an auction campaign and 80 of them sell at auction the statistic declines to 80 per cent even though it is far harder for 80 properties to sell at auctions than for one. Because auction clearance rates are highly sensitive to the number of properties selling within an auction campaign, the statistic is highly volatile and responsive to the stock on the market.

In this way, the volatility of the rates can show a high clearance rate during a week of low auction volumes but this does not mean there is high buyer demand; it may only reflect that a small number of auctions took place with high competition due to the limited stock.

Auction withdrawals hide negativity

It’s important to understand how the clearance rates are impacted.

If a property is scheduled for auction and is withdrawn before the auction day, it will not be included as a “failed” auction.

Agents often withdraw properties if they sense they won’t get the desired price, which further masks the true state of demand.

Therefore, properties that are withdrawn before auction due to lack of interest will skew the clearance rates upward because they were not technically “passed in”.

Interest rates and external factors

Clearance rates are also highly sensitive to broader economic factors, particularly interest rates and consumer sentiment, but they may not accurately reflect how these factors affect the entire market.

In a high-interest-rate environment buyer affordability declines, and many potential buyers may take longer to decide on their property purchase.

This will entice agents to sell via private treaty over an auction campaign. With less properties for sale via auction, clearance rates may still remain steady when in reality there are less auctions, and days on market (the time it takes for a property to sell) might be longer.

Moreover, sentiment can temporarily skew clearance rates.

When the market is booming, more sellers and agents are likely to pursue auctions, as they anticipate strong competition driving up prices.

Conversely, in times of market uncertainty or declining prices, sellers may avoid auctions, preferring private sales to better control the process. In these cases, clearance rates might decline, but the market activity could remain stable through other sales methods.

Clearance rates versus days on market

Clearance rates refer to the percentage of properties sold at auction within a specified period. Days on market signifies 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 gain 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, as we will discuss how these metrics can give a false indication of the state of the overall market.

Auctions reflect competition, not value

Auction environments are designed to encourage competition and urgency, which can drive prices higher in certain situations.

This environment may not reflect true market value, particularly when buyer sentiment is optimistic or competition is artificially inflated by the auction process itself.

Properties sold through private treaty, where negotiations occur in a more controlled environment, often achieve prices based more on fair market assessments rather than competitive bidding.

Thus, auction clearance rates may reflect short-term fluctuations in buyer enthusiasm rather than the overall market’s pricing trends.

What these metrics can provide to investors

Albeit misleading on some levels, these metrics can still provide property investors some valuable insights into the level of competition, buyer sentiment and pricing trends, enabling investors to gauge the market activity, growing market demand, and level of risk associated with various investment choices.

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 markets.

While auction clearance rates can provide a snapshot of certain aspects of the property market, they fall short as a comprehensive market indicator.

Their limitations include a narrow focus on certain property types and therefore have inherent biases in data reporting and methodology.

By ignoring private treaty sales, post-auction negotiations and regional variations, clearance rates give only a partial view of the property markets.

When using auction clearance rates to summarise the state of the property markets, they should be considered alongside other key indicators, such as sales volumes and price trends, days on market, and broader economic data.

API Magazine publishes national clearance rates and private sales data weekly.