How to read real estate market trends using auction clearance rates

by Chris Lang on February 23, 2012

Property Sold in Auction Under the Hammer

Auction clearance rates are a big deal in Australia. Around one-third of all residential properties are sold via auction, which justifies the importance of this indicator. Clearance rate is reported as a percentage – for example, 70% means that 7 properties out of 10 auctioned were sold on that particular Saturday.

But in addition to the straight-forward meaning of auction clearance rates, this percentage can reveal whether we are now in a buyer’s market, a neutral market, or a seller’s market, and thus tell us what to expect next. A buyer’s market means a market where supply outstrips demand (there are more houses for sale than buyers), a neutral market is when supply and demand are equal, and a seller’s market is when the demand outstrips the supply.

Every Saturday the clearance rates are calculated and published by several sources of property information. Each source has a slightly different method of calculation and therefore the clearance rates provided by, for example, RP Data will be somewhat different from results provided by APM. This article will stick to the method of APM as being the most conservative.

How exactly is auction clearance rate calculated?

Here is the formula used by APM:

Clearance rate = (Sold under the hammer + Sold prior)/ (All Sold + Passed In + Withdrawn).

A short explanation about the formula. Any property advertised for auction can be either

Sold under the hammer – self explanatory
Sold prior to auction – if a buyer makes an offer the vendor can’t refuse prior to auction
Passed In – there were no bids higher than the seller’s reserve price, so the property did not sell
Sold after the auction – self explanatory
Withdrawn – the auction never happened, as the sellers have changed their mind.

Auction Clearance Rate Gauge

How to read the real estate market trends

Property experts seem to agree that when auction clearance rates hover under 60% for about a month that indicates market slowdown, what we call a “buyer’s market”; up to around 70% is a neutral market where supply meets that demand, and closer to 80% and up is a seller’s market.

How auction clearance rates are connected to house price movements

Movements of prices in Melbourne’s residential market are closely related to auction clearance rates, according to Neville Hurst and Prof. Richard Reed from the Faculty of Business and Law, Deakin University in Melbourne. Higher auction clearance rates are associated with higher house prices, and when auction clearance rates drop, house prices normally follow.

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