What the clearance rates don't say

As the spring residential property market gears up, analysts will be watching weekly auction clearance rates as an indicator of market conditions. But, as with most statistical real estate indicators, we need to dig a little deeper to understand the basis of these figures and what they do and don’t tell us. There is a widespread myth that the higher the percentage clearance rate, the more robust the market.

Auction clearance rates do provide a broad-based snapshot of geographically undifferentiated activity across a city and metropolitan area, but taken at face value they can be widely misinterpreted and their importance overemphasised. In addition, clearance rate figures are voluntarily supplied by selling agents, and media outlets vary in the amount of detail they include. Unless an individual hunts for the finer detail, a skewed interpretation of activity can result.

For instance, the percentage of auctions vs sales that take place either side of a scheduled auction is often not spelt out. Therefore, the figures can obscure how many properties may have been sold prior to or after an auction, by private treaty, tender or a boardroom auction prior to the public auction.

Confused? Then let’s make it clear what these percentages actually tell us.

The clearance figures we read in the press are based on three types of sales classifications:

• Sold at auction – properties sold from the time the auction is scheduled until midnight that day.
• Sold before auction – properties sold from the moment of listing until the time the auction begins.
• Sold after auction – those properties sold from midnight of the auction day until midnight the following day.

Real estate institutes use the figures to plot any increase in the number of properties being sold by auction rather than by private treaty. For instance, in Victoria, the REIV says that significant increases in the number of properties being sold at auction indicate a buoyant market, because agents and vendors are more confident of better auction outcomes. Bear in mind that the inner urban areas of Melbourne and Sydney in particular, with their consistently higher levels of demand versus supply, would tend to favour auctions across the year, whereas private treaty methods are more often the norm in outer suburban and regional centres and smaller capitals.

If we take Victoria as an example, the REIV’s latest figures show that in the current buoyant sales market, private sales have dropped in favour of auctions in most inner-urban locations. Auction sales in Melbourne’s CBD and inner ring of municipalities – two to 12 kilometres from the CBD – have totalled 9879 so far in 2007 compared with 7440 for the same period in 2006. Private sales in the same areas totalled 7910 so far this year, but stood at 8045 for the same period last year. At the same time, total sales – both at auction and private treaty – increased from 15,485 in 2006 to 17,789 so far in 2007, indicating that a higher number of properties have come on to the market across the year and buyer demand has so far kept clearance rates above 80%.

In Sydney, auction clearance rates have ranged between 61% and 71% over the past three weeks, according to figures from the REINSW. But, on closer inspection, clearance rates can be as low as 49% in South Sydney and a buoyant 71% in the eastern suburbs. Figures are fine, but none of the data gives us a benchmark for relative market buoyancy.

Across an entire year – unless there has been some major impact on the property market – we would expect to see a clearance rate of 60–70% and this range indicates a balanced market. Clearance rates consistently above 80% indicate a very high level of buyer demand and a reduced supply. For instance, across Melbourne’s inner-urban areas, clearance rates so far this year have ranged between 81.8% and 91.6%. For the same period last year, the range was from 68.3% to 85.1%. Less buoyant geographical areas, where the demand/supply ratio is more balanced, return much lower clearance rates.

Once the busier spring market begins – generally from the first week of October to the second week of December and more stock comes on to the market, clearance rates anywhere between 60% and 80% would be considered normal. But, the temptation is to interpret any drop in clearance rates as indicative of falling prices and a slowing market. Not so!

It is only when the rate falls consistently below 60% that it might herald a market change, and usually it is not because values are plummeting! This could indicate a lower volume of buyers, that vendor expectations are too high to effect large numbers of sales through the normal auction process, or that vendors are being pressured to sell. A significantly oversupplied market, well in excess of even strong demand, can also dilute the clearance rate outcome.

If the rate remains consistently above 70% at the start of spring and remains at that level mid-way through December, it is often a sign of buyer strength that is likely to remain consistent in the market once it gears up again in February. We could then expect to see a strong level of opening activity off the back of continuing pent-up buyer demand. If clearance rates remain consistently above 80% during spring, then that could be regarded as an extraordinary level of demand, especially if the market is well supplied.

Finally, given the voluntary nature of sales reporting in the industry, the data must necessarily be viewed as incomplete. At best, the figures should be viewed as informative rather than directive. Further, there is nothing to stop an agency only reporting in on weekends where their clearance rates make hay for the business! For instance, they may well report in when they sell 80–100%, but decide not to bother on weekends when they only do 50–60%.

Until we have mandatory reporting of all sales in a regular and timely fashion, investors should view this data as nothing more than what is a very broad indicator of trends. Like all data associated with residential property, clearance rate figures are an interesting insight into market activity, but offer no substitute for actually getting out into the marketplace to gauge the level and behaviour of buyer demand. Each of the different market sectors – inner, middle and outer urban – need to be studied individually.

Property Q&A

This week I deal with questions on:

• Ticking all boxes on buying criteria
• Selling three properties to buy one
• Timing the market
• A new property is falling apart

Ticking the boxes

I enjoyed your article Property scammers are back. Having the choice in 1994 of buying a small house in Brighton for about $250,000 or buying an off-the-plan apartment in Southbank for a similar amount, I made the fateful mistake of doing the latter. Do you regard the Regency Towers in Melbourne as being an example of a top-notch asset similar to the Republic Tower or the Panorama in Carlton?

Thank goodness you have learned from your experience. One of the potentially biggest mistakes is to retain a low growth asset in the hope that it will eventually show a better return. It is often better to cut your losses and redeploy your funds into a properly selected asset. The selection criteria I applied to some multi-unit CBD and CBD fringe developments were quite specific. When attempting to judge the viability of such an investment, never be tempted to just tick one or two of the boxes, but make very sure such a property has all of the stated selection criteria. Because so much emphasis is placed on position in the tower, it is difficult to give you a definitive answer. Regency is one of the better options for complexes, but the best idea is to have an independent assessment done and particularly to compare the purchase price with an accurate current market value.

Three into one does go

You stated in an answer on August 15 that the only legitimate way to produce positive cash flow is through increasing the equity you control. My husband and I are low to middle income earners. We have three investment properties in major regional centres in Queensland that have required relatively little input from our already stretched income. We have a pretty good equity ratio, although the actual net figure is relatively low (about $300,000). We desperately want to invest in inner-Brisbane, but just don’t have the cash flow to do so. How do we produce positive cash flow in our situation? Is investment in high growth areas even possible for us?

The first issue you need to examine is the primary reason why you bought the three regional properties. Was it for income or capital growth? If it was for income and you are using that income to build equity in the properties, then examine whether the equity you have accumulated might be better placed in one or two properly selected investment properties in inner Brisbane. If you can at least cover the shortfall between the rent and loan repayments by selling one of your low growth assets in favour of smaller, higher-growth properties, it will give you more rapid build up of equity. That in turn will deliver a better rental income over time.

Start by having your borrowing capacity, total equity and cash flow capability assessed. Be prepared to enter the market with a quality established one or two-bedroom apartment in inner-Brisbane. It is not so much about the number of properties you have, but the underlying quality and growth potential of the assets. It is quite difficult to get your head around the concept of acquiring one small inner-urban property – such as a prime one-bedroom apartment – as opposed to holding three larger properties that may have collectively cost around the same price. However, that one well-chosen asset can deliver far greater capital growth as well as consistent rental income that is not as subject to fluctuations as might be the case in the more limited and less diversified regional area economies.

Timing the market

Is it better to wait until the spring property market gets into full swing before buying an investment property? I ask because it seems that because there are a lot more properties put on the market at this time of year, the choices would be greater and the chances of actually successfully bidding or negotiating for something would be higher.

This is quite a common question and it falls into the category of trying to time the market. Yes, there is greater supply in the market during the autumn (March to May) and spring (October to mid-December) property markets. But often, there is greater pent-up buyer demand as well. Don’t confuse increased supply with the notion that this may bring about lower prices or greater choice of the premium investment assets in the prime locations. There is still an erroneous assumption that more limited supply in the autumn and winter months somehow means less opportunity. Therefore, you may wait for spring and find pent-up demand from winter can sometimes push prices higher than you may have been expecting. Individual seasonal influences are short-term glitches. Focus your efforts on finding the best quality asset you can afford and buy it when you can, irrespective of the time of year, with the view of holding it for the long-term. The quality of the asset and time will ensure natural capital growth and ride out any cyclical ups and downs.

New property, falling apart

About a year ago, we bought a fairly new property (about four years old) with the idea of letting our son and daughter-in-law rent it for less than the market rate with a view to them taking over the mortgage and the title and making it their home. It isn’t what we would normally have chosen in property terms, but it was what they had their hearts set on and it was our way of helping them save and get a roof over their heads quicker than they could otherwise manage. What has really surprised (and annoyed) us is how much the property has deteriorated over a relatively short time. Fixtures and fittings have had to be replaced, walls have cracked and tiles have fallen off. Should we get a building inspection to see what else might potentially go wrong?

Your question provides a very good checkpoint for anyone buying a property, whether it has just been built, is only a few years old or of a period style. Just because a building is new, doesn’t mean it is necessarily more structurally sound than an older one. New buildings can have as many structural problems as older ones. Building standards can vary greatly. It is always very good insurance to have a building inspection carried out before you purchase. In your case, a building inspection now could well provide some forewarning of any major faults in the structure.

Note: We make every attempt to provide answers to readers’ questions, however, answers are of a general nature only. Subscribers should seek independent professional advice for more in depth information that is specific to their situation.

Monique Wakelin is co-founder of Wakelin Property Advisory, www.wakelin.com.au, a Melbourne-based independent property acquisition and advisory company, and co-author of Streets Ahead: How to Make Money from Residential Property.

Do you have a property question for Monique Wakelin? Send an email to monique@eurekareport.com.au