Unlike fungible assets like shares, property is not measured by an index in Australia, although the US does have the Case/Shiller Index. As a result, most look to the auction clearance rate as a de facto indicator of the strength of the residential property market. A higher clearance rate indicates strong demand and is indicative of a rising market; by contrast, a lower clearance rate is a leading indicator of falling prices.
Clearance rates are important to real estate agents. Like stock brokers, real estate agents profit from turnover and it is in their interests to create the impression of a still buoyant market. The reported clearance rate figure is particularly relevant in Melbourne, which generally sees predominantly Saturday on-site auctions. The Sunday Age reports the clearance rates (provided by the Real Estate Institute of Victoria) in its Domain section on Sunday. This week, the “Market Wrap” section claimed that:
Maybe it’s the slash in the interest rate or new demand from the increased first home-buyers grant. Maybe there’s some real bargains to be had, or vendors just really need to make a sale before the end of the year. Maybe it’s just a fluke.
Whatever the reason, the clearance rate rose to 55 percent, up 4 percentage points after hitting a new low for the year last Saturday.
The data provided to The Sunday Age are supplied by the Real Estate Institute of Victoria (which is, in effect, the Real Estate Agents union). However, a Crikey study reveals that the figures claimed by the REIV and reported by The Sunday Age are misleading. Crikey has calculated that the actual auction clearance rate last weekend (based on a sample size of 332 auctions) was approximately 43% — well below the 55% figure claimed by the REIV.
Last weekend, Crikey attended three separate auctions in Melbourne’s South Melbourne (which could loosely be compared to Sydney’s Paddington or Woollahra). In each of the auctions, not one single bid was submitted. However, in reviewing the auction results the following day, only one of the three ‘passed-in’ properties appeared to be counted in the determination of the clearance rate. That means either agents aren’t reporting passed-in properties, or the REIV is ignoring data relating to passed-in properties to boost the reported clearance rate.
In addition to such abnormalities, the reported auction clearance rate also appears to include properties subject to ‘private sale’ (in the listed key, a code is devoted to ‘private sale’). A ‘private sale’ is a negotiated purchase, as opposed to a competitive auction. If the REIV includes private sales in its calculations, this will artificially inflate the reported clearance rates. That is because private sale properties are usually advertised for a number of months and are not considered in calculating the clearance rate during that time.
On Saturday, The Age listed 332 auctions that were taking place that day. Crikey reviewed the actual results reported (assuming that if no result was reported, the property was passed in), comparing the foreshadowed auctions with the listed results. The actual calculation appears far less rosy than the scenario painted by the REIV. Of the 332 Melbourne properties listed for auction on Saturday 6 December, 144 were sold — a clearance rate of less than 44%. A stark contrast to the reported clearance rate of 55% and well below the clearance rates achieved in 2007, which often exceeded 80%.
As unemployment continues to rise, residential property, especially property priced above $500,000, is expected to fall significantly. The reduced clearance rates indicate that vendors have so far been unwilling to adjust their price expectations in light of reduced demand. However, vendors may not have such luxuries for long. As unemployment rises, some vendors, already suffering mortgage stress (including those in exclusive suburbs like Vaucluse), will be unable to service mortgages payments and be forced to ‘meet the market’. If and when that occurs, expect to see more fire-sales and a sharp decrease in residential property prices.
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