real estate auction strategy

Why clearance rates are a sign of seller – not buyer – sentiment

Profile headshot of Justin Nickerson

27 Aug, 2018

By Justin Nickerson

I firmly believe that auction clearance rates are the property market’s most irrelevant statistic.

I know that sounds controversial but there are many reasons why I feel this way.

Seller says no

Let’s say, hypothetically, you have 100 properties going to auction this Saturday and at every one there are four registered bidders who are competing strongly.

And let’s say, as an example, that regardless of this robust bidding, the seller says, “Nah. I don’t want to sell at that price”, which, of course, is their prerogative.

So, that would mean the auction clearance rate was zero per cent, which would be interpreted that the market is absolutely terrible.

The thing is the market isn’t terrible, because there was strong bidding for the property, it’s just the sellers weren’t prepared to listen what the market was telling them about price.

That’s why I believe auction clearance rates don’t reflect market strength.

They reflect the sellers who are prepared to accept the market conditions at the time.

A more accurate measure of market strength is the number of active bidders per property, but no one records those numbers at a macro level.

Agent influence

At the end of the day, agents can only influence sellers by providing them current market information – including buyer feedback.

But they cannot control whether vendors ultimately decide to sell a property at auction.

What agents should be reporting is the opportunity to sell by auction.

That is, the percentage of their sellers they have given an opportunity to sell in a designated timeframe.

The problem, of course, is that no one currently records this information, but they should in my opinion.

Auction clearance rates have become a misunderstood barometer of the market because they are easy to track and report.

Now, I’m not saying that auction clearance rates don’t matter at all, because they actually do, but what they are purported to represent is inaccurate.

What they represent is the percentage of sellers who are prepared to accept the market conditions on that day.

Variable results

We all know that clearance rates go up when the market is strong, because sellers are happy with the prices that buyers are prepared to pay for their properties.

Conversely, when the market is soft, clearance rates fall because sellers have yet to catch up with the reality of the current market conditions.

They are still hoping for yesterday’s prices today.

The thing is, you can still have spirited bidding in softer markets, but you don’t have the same number of vendors who are prepared to sell.

For some reason, property is not viewed the same as shares, which involves accepting the market price whenever you want to sell.

A seller might have bought a property for $550,000 but today the highest offer is $480,000, which usually results in the property being passed in because they’re not prepared to accept market reality.

So, using this new thinking, a clearance rate of 50 per cent simply means that half of the sellers were prepared to sell on the day and half were not.

In short, as a buyer, it means that you have a 50/50 chance of securing the property.

Recently, we had an auction where there were 10 registered bidders with five actively competing to buy the property, but the seller still opted to say that the price was not enough.

Of course, that result then gets recorded as a failed auction, but if the seller had said yes, the auction would be viewed as a success.

In reality, the seller ultimately chooses to sell, or they don’t – whether there are five bidders or 50.

And that is why auction clearance rates are a barometer of seller – and not buyer – sentiment if you ask me.