Auction clearance rates don't rate

The head of one of the country’s biggest real estate groups says we have it all wrong when we use auction clearance rates as a measure of how the market is either improving or declining.  He gives us some better indicators.
Kevin:  Quite often, when we’re looking at market sentiment, we look at a number of barometers but the one that seems to come up all the time is auction clearance rates. There’s one school of thought that says it’s not a good enough barometer on its own to measure what’s really happening with the market. This is a blog article that was recently written by Grant Harrod, who is the Chief Executive of LJ Hooker.
I guess, Grant, you would well and truly know whether or not it is a good measure. What’s your thought behind this? Welcome to the show. Thanks for your time.
Grant:  No problem; thank you. Look at the national stats around the number of properties that are sold by auctions versus private treaty, and it averages around 27%. Clearly, more than two-thirds of properties are sold outside of auctions through a private treaty arrangement.
If you look at it by state, in some states, it’s actually as low as less than 10%. Certainly, New South Wales and Victoria – or specifically Sydney and Melbourne – are the markets in which you tend to see auctions used a little bit more regularly, but if you move into regional locations or into other states around Australia, it’s actually not a regularly used method of selling a property.
The other side of this is that there are a lot of properties that probably start life in an auction process because, really, we see it as more of a method of marketing than necessarily a method of transacting a property. They’ll start with an auction campaign, which has the benefit of concentrating the process into a three- to four-week period, and which obviously really benefits the vendor and the purchaser, and also the agent, as well. A number will sell before auction, and then a number will also sell after auction. Checking the clearance rate on the day is – in our view – not necessarily an indicator of the health and well-being of a particular property market.
Kevin:  Just to take that thought one step further too, Grant, the day of the auction is influenced by so many factors, not the least of which is whether or not the property has a realistic expectation put on it by the seller, which is a direct reflection sometimes on the activities of the agent, how well the agent has been educating the seller, ready for them to meet the market.
Grant:  Correct. I’d also extend that to suggest the vendor, as well. You can imagine in a market like we’re in at the moment, where you do have a number of real estate markets that are coming off a high point, managing the expectation of the vendor is quite challenging.
They’ve probably been considering selling their property for quite some time. They’ve been tracking the market, they’ve seen the home down the road go for a particular number, and they’ve decided, “That’s my price. I’m going to put my property on the market.” Of course, the markets are moving around quite a fair bit at the moment, and therefore, that may not necessarily be what the purchasers are prepared to pay for that market.
An auction process is valuable in the extent that it gives both the buyer and the seller a very clear visibility to what the market is prepared to pay. But more often, from an agent’s perspective, it’s actually managing the vendor – the seller’s expectation – that is the critical part.
Kevin:  Given that we can’t rely on those auction clearance rates as a barometer for the market, as you so clearly pointed out, what are some of the indicators that you would suggest consumers should be looking at to gauge where the market’s at?
Grant:  I think one of the most [4:08 inaudible] measures is time on market. As an example, in the Sydney market and certainly in some of the markets that are the closest to the CBD, we’re seeing a very short time on market. There’s a lot of buyer demand. There’s a shortage of listings. So when properties are coming on market… And some are actually being sold before they come on market. Agents are reaching out to their databases in advance of actually starting the marketing campaign for the property and in many situations, selling it before a campaign has even been undertaken.
But contrast that to, say, Perth. The average time on market in Sydney could be as low as 20 days. Then you go to Perth, and the average time on market there now is 60 days, if not heading now towards 70, even 80 days, where you obviously have a lot of listings, a lot of stock, but not enough buyers. For us, one of the key measures of the state of a real estate market is what is the average time on market for properties?
Kevin:  Great advice, Grant. I really appreciate your time and your insight there. Grant Harrod, who is the Chief Executive of LJ Hooker.
Grant, thank you very much for your time.
Grant:  Thank you.

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