Auction clearance rates…what do they mean?

Auction clearance rates (ACR) seem to be the media’s favourite or only data source when predicting the impending property crash or boom. So, the question beckons, what do auction clearance rates tell us about a property market?

The calculation of clearance rates varies between the property data collection and research companies.

Clearance rate = (sold at auction + sold prior to auction) / (all reported auctions + those withdrawn)

A clearance rate is a strong indicator of a market sentiment. It helps to distinguish whether we’re in a buyers or sellers’ market. A clearance rate above 65% can be classed as a sellers’ market whereas one below 65% can be classed as a buyers’ market.

Throughout Sydney’s boom period, clearance rates were recorded at circa 90%. As a result of the exponential demand the market achieved significant growth in prices. The strain on affordability and risk of rising interest rates has resulted in a slow-down in the market and therefore a reduction in ACR.

The reality is they provide us with a great insight into the current state of the market but it’s important to understand that there are many moving parts in the data used to calculate a clearance rate, understanding what affects these results is important. An ACR is affected by many very simple variables, on weekends which coincide with bad weather, major sporting events and/or religious holidays results can be skewed. The results are seasonal whereby spring and summer tend to provide stronger auction results and therefore higher clearance rates. A clearance rate shouldn’t be looked at in isolation when assessing a market.

Our job is to identify the factors within a market which will cause a reduction or a rise in clearance rates. Identifying the demand inducing drivers within a market allow us to successfully pinpoint, the markets of opportunity for our clients.

Although clearance rates provide us with an insight into the current state of the market, our job is to be far more comprehensive and detailed in our research. Looking at sales volumes, clearance rates, vacancy rates and rental demand provides us with the state of the market but assessing the broader factors of a market such as, forecasted supply, forecasted population growth, future infrastructure projects and employment prospects works as a prediction method to identify potential areas of growth.

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