Auction Clearances - Phooey!

Each weekend I read with interest some economist or property expert’s opinion on the real estate market based on the relevant auction clearance rates and realise what a joke their views really are and how disconnected they are from the marketplace. They are totally out of touch with market sentiment and their views would be similar to flying a jumbo jet blindfolded. One wonders how serious they value their credibility.

Auction clearance rates have nothing to do with the real state of the housing market and cannot be relied upon to forecast movements in market values. Quite simply, many auction results are falsely reported by estate agents, especially in relation to whether they have been sold under the hammer, or passed in on a vendor’s bid or, in many cases, not reported at all.

These expert’s problems are quite simple, yet they have not looked closely enough. Each state has suburbs and areas that are suited to the auction system and others that are suited to private sales. Yet each weekend estate agents conduct auctions knowing the property won’t be sold, and run ads more to promote themselves than the auctions. These factors have a clear impact on clearance rates.

Property experts cannot infer from clearance rates the strength of the market or whether it is heated, strong or slow because the results are affected by reserve prices and estate agents’ “games”.

How does a tightening of the rental market and the lack of construction of new homes affect a purchaser’s decision to buy a house in either Toorak, Woolhara or Sunshine Beach? It doesn’t. What these experts need to realise is that the Australian residential market is polarised: the top end is healthy and the bottom end '” country, rural and holiday market areas '” is soft with a distinct lack of buyer interest.

Perhaps in the future the experts should forecast on two markets: the established inner city, and the suburbs and rural areas if they are really to get their market forecasts factually correct.

In Victoria last Saturday, for example, two properties were resold in the space of two years without either having been touched. One, bought for $1.49 million two years ago, sold for $2.5 million; the other, a single fronted weatherboard, was bought for $970,000 two years ago and sold on Saturday for $1.43 million.

These results, of course, don’t even get a mention with respect to auction clearance rates, yet they are not isolated examples. Other states have also experienced similar results, yet if you are to believe the forecast and auction rates over the past year the market has supposedly only moved at 5%. One wonders how they can get this so wrong.

Auction clearance rates are misleading and statistically just don’t work in the real world. Economists and property writers need to get out and feel the heat and tempo of auctions to really understand what buyers are doing and what they are prepared to pay. Looking at distorted figures will not tell them that.

The market is really driven by public sentiment, and supply and demand, not by auction clearance rates. Each weekend up to 100 vendors could simply be testing the market: fishing for a high price with no intention of selling for less. Regrettably, I encounter this week in, week out, yet these results still distort the clearance rates and their effect on the market.