Auction stats highlight price expectation gap

Auction clearance rates provide one of the timeliest indicators about how well buyer and seller price expectations are aligned. With clearance rates averaging below 50% across the combined capital cities, it looks as though vendors may still have higher price expectations than what buyers are prepared to pay.

Auction clearance rates are a closely watched indicator of how the market is tracking. The reason that they are important is that typically, auction results are much timelier than private treaty results. Although auctions account for a relatively small portion of the overall market, auction clearance rates are one of the best guides about current market performance, particularly in Melbourne and Sydney where auction sales are much more common (these two cities account for about 80% of all auctions across the capital cities).

Over the year to date (excluding the results prior to January 16 when the market was still coming out of the festive slowdown), weighted average auction clearance rates on a week-to-week basis have been recorded at 48.1%. In comparison, during the same period in 2010 they were recorded at 60.4% and in 2009 when the market was particularly strong they were 69.2%. The highest clearance rate recorded since the start of 2009 was 79.7% during the week of September 13, 2009 which is also when market conditions were at their peak and just prior to the first increase in official interest rates by the RBA.

Across Australia, on average during 2011 there have been 1,291 capital city auctions this year compared to 1,534 in 2010 and 1,173 in 2009. With clearance rates averaging below 50% this year there does seem to be a disconnect between buyers and sellers. During 2009, there were typically more than 100 fewer auctions each week than there has been this year however, clearance rates were averaging a much higher 69.2% each week.

The significant weakening of clearance rates is reflective of the marked slowdown in housing market conditions. Clearance rates have eased, property value growth has flat-lined, sales volumes have dropped and time on market and vendor discounting levels have increased. The first hint of these weaker conditions became evident in October 2009 when the Reserve Bank began lifting interest rates, and the trend has become more apparent over time.

So why do vendors continue to take their properties to auction despite the comparatively poor success rate in the current market?

An auction campaign will generally achieve greater exposure than a private treaty sale due to the intensive marketing campaign where the property up for auction is heavily advertised for the month leading up to the auction. Also, some people suggest that an auction is the best way to achieve top dollar, particularly for unique properties where it is difficult to gauge the market value. If you look at the most expensive sales each week across the country, these properties have usually been taken to auction.

On the flipside of the argument, with clearance rates recorded at just 48% during 2011, the odds of selling a home at auction have slimmed markedly compared to the same time last year. Of course, many unsuccessful auctions are later sold through direct negotiations with the bidders. Given that clearance rates have weakened so substantially, it does seem counter intuitive that auction volumes have remained quite strong. This must be weighed against the fact that it currently takes an average of 59 days to sell a home and vendors on average have to drop their asking price by -6.5%.

Looking at the total number of capital city auctions versus the total number of capital city sales between the 2009 and 2010 calendar years, in all cities less than 40% of all properties sold had been taken to auction. In fact, outside of Sydney, Melbourne and Canberra less than 15% of all properties sold were taken to auction.

Importantly, just because a property is taken to auction, it doesn’t necessarily mean that it will sell.

Although 35.6% of all dwellings in Melbourne were taken to auction during 2009/10, ultimately only 26.1% of all dwellings sold at, before or during the week after the auction. The result indicates that even in our most prevalent capital city market for auctions (Melbourne) only one in every four properties actually sells at auction.

Tim Lawless is the Director of Property Research at RP Data.