Matthew Hassan's ‘how to’ guide to reading auction clearance results
EXPERT OBSERVATION
Weekly auction results are by far the most timely gauge of conditions across Australia’s housing markets.
For observers of the Sydney and Melbourne markets, a Sunday isn’t complete without checking the weekend clearance rate. That said, to get the right take from these figures it’s increasingly important to apply a few adjustments first. This note gives some quick tips on how to do this and how to judge whether a result really is strong, weak or indifferent.
In interpreting weekly clearance rates, there are two main effects we need to adjust for – ‘early result’ bias and seasonality – and a third aspect that, once incorporated, gives a clearer guide to price conditions.
Early results skew high
Unsurprisingly, successful auctions tend to get reported earlier. Patterns depend according to data provider but for CoreLogic, preliminary results are published on the Sunday then a final estimate on the following Thursday. The difference in terms of clearance rates is on average 3pts for Sydney and 1pt for Melbourne. However, the weaker market over the last 18 months has seen more slippage than usual, averaging closer to 5.5pts for Sydney and 1.5pts for Melbourne.
- So, step one, for preliminary clearance rates, deduct 5.5pts for Sydney and 1.5pts for Melbourne.
Seasonality positive heading into Autumn and Spring, negative around Christmas
The time of year also matters. Buyers and sellers come and go from the market at slightly different times, producing a regular ebb and flow to clearance rates as the balance of power shifts. For March this effect is worth about 2pts in Sydney, slightly more in Melbourne. Seasonality diminishes gradually heading into Winter, re-emerges in Spring and then turns sharply negative as buyers disappear over the Summer holiday period.
- So, step two, take another 2pts off for seasonality (tweaking this as the year progresses).
Pre-auction withdrawals an important clue to size of price declines
One of the appeals of tracking auction clearance rates has been the relatively tight relationship with price growth. Generally speaking, clearance rates above 65% were typically associated with solid gains, and over 75% with outright strength, while rates below the 50-55% range were associated with price declines.
That broad relationship still holds. However, clearance rates do not seem to be capturing the full extent of price weakness during the current correction. The lows seen late last year, in the 45-50% range, are comparable to those in 2011-12 and previous cycles, yet the pace of price declines has been somewhat faster.
Another aspect of the auction results – pre-auction withdrawals – may shed more light on this and provide a way of refining the measure to give a better gauge of price conditions. Historically, around one in eight properties heading to auction in Sydney has been withdrawn prior, with a much lower share – one in thirty – in Melbourne. Both have risen materially over the last year, and much more sharply than during previous downturns. In Sydney, it has been more than one in five and in Melbourne it has been about one in every fifteen.
Pre-auction withdrawals are part of the ‘uncleared’ portion of the clearance rate. However, they are likely a good indicator of a more stressed market. Whereas a passed in result may be due to bidders not taking the price above reserve, a withdrawal points to sellers assessing that there will be insufficient bidders to even justify an auction.
How do we allow for us in our quick assessments? One relatively simple way is to calculate the ‘withdrawal rate’ – the proportion of auctions being withdrawn – and adjust the clearance rate by how this is varying to long run averages. For Sydney that adjustment is the clearance rate plus 14pts minus the withdrawal rate. For Melbourne, it is the clearance rate plus 3pts minus the withdrawal rate (the 14 and 3 in these calculations reflect the long run average withdrawal rate in each market).
- So, step three, adjust both for the withdrawal rate gap to average
Conclusion
In summary, three relatively simple tweaks to the Sunday auction clearance rate give us a clearer idea of how they stack up:
- A mark down for early result bias: currently –5.5pts for Sydney, –1.5pts for Melbourne;
- An adjustment for seasonality: currently –2pts for both markets;
- Incorporating pre-auction withdrawals: deducting the ‘withdrawal rate’ gap, the difference between the withdrawal rate and long run averages – for Sydney this is currently –8pts (22% withdrawal rate vs long run average of 14%); for Melbourne it is –3.5pts (6.5% vs 3%).
The resulting ‘adjusted’ clearance rate can be compared against the usual benchmarks (>65% associated with solid price gains,
By way of example, Sydney’s preliminary clearance rate in the last week of February was 58.6% – knocking 5.5pts off for early result bias, 2pts of for seasonality, and a further 0.5pt for the withdrawal gap (14.5% vs avg 14%) gives an adjusted estimate of 50.6%, still a soft result but somewhat improved on the very weak reads late last year. The same adjustment for Melbourne takes a preliminary 53.1% clearance rate down to 50.1%.
Interestingly, in both cases the main shift in early 2019 looks to be coming from a reduced rate of withdrawals rather than a lift in clearances. That may be an early sign that the pace of price declines is moderating. However, both shifts will need to be sustained and extended before auction market results are consistent with price stabilisation.
