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Curious clearance rates

Auction clearance rates are commonly used to signal the state of real estate and other markets. High clearance rates are used to suggest that the market is strong and that prices are holding or increasing. Similarly properties that are ‘keenly sought’ are sold quickly while those not so desirable take longer to sell. Every week in the press these types of statements abound.

On the face of it that notion is inconsistent with what I understand about free markets and auctions. Vendors set a reserve price for properties and purchasers bid on the properties. If price exceeds the reserve price the property is sold and otherwise it is passed in. The clearance rate is the percentage of properties sold relative to the number offered for sale. Thus a clearance rate of 75% means ¾ of properties offered for sale were in fact sold.

If the clearance rate is high it can mean that buyers are offering prices that are high relative to those sought by the seller – so demand is strong – or it can mean that sellers are asking for relatively low prices because they see demand as weak. I don’t think you can infer much about the state of the market from clearance rates without reference to actual price trends since the clearance rate reflects thinking of both buyers and sellers.

It is true that keenly sought properties, like apartments with a great view, often tend to sell very quickly which does surprise me. Indeed there are sometimes reports of units selling in a few hours and of failed buyers being unable to secure a unit. My thoughts in this situation centre on why the vendor did not ask for more. Maybe the story is that, in markets with valuable assets, excess demands resolve quickly because buyers and sellers have increased desire and ability to settle. It is probably something very simple but a good explanation for why particularly desirable assets of any type should sell especially quickly does not occur to me.

7 comments to Curious clearance rates

  • rabee

    Clearance rates may indicate unanticipated changes in demand.

  • hc

    Rabee, That’s right. I guess I have assumed buyers and sellers respond to the same information sets so that clearance rates are a random walk. It could be tested.

    Any ideas about why highly desired assets sell quickly?

  • FXH

    I think some of those “desirable” units sell quickly because there are shonky deals, rent /return guarantees, lo-doc loans that have to be sealed quickly to avoid scrutiny etc.

    I’m not sure if all highly desired assets clear quickly. Do say Toorak mansions clear quickly? If they do it might be explained by the fact that highly prized land / buildings are in short supply and have potential buyers estimating and refining their worth months / years before they come on the market and therefore they come on the market with both sides knowing the exact price to clear – not too dear or too cheap.

    The Real Estate market is still a market with a distinct lack of information for buyers and sellers. There si no reason at all why there can’tbe an online searchable data base of house prices in any street or neighbourhood for the last 20 years or so. It would cost bugger all as the only input needed after the intiial database (which I assume the titles people already have digital)would be house prices.

    The prices would need to be confirmed with the stamp duty mob as the agent reports can’t be trusted.

  • Penny

    Units with ocean and Sydney Harbour views are hard to rent out on a long-term, permanent basis because the rent has to be usurious and people who can afford upwards of $800 p.w. find renting multi-room houses much better value. And at that rate they can afford to buy their own and service their own debt. Or two.

    However, such properties, while they do not yield much (over a year) have until now, appreciated at a rate which allowed for servicing the debt and then a little bit in the kitty by way of capital gain.

    When people sell an investment property they are usually geared to buggary and need to be rid of it quickly. In this way, expensive units are like currency.

    Living in your own investment unit is like a dope dealer smoking his own dope. It defeats the purpose. Also, you are instantly homeless if a buyer comes along who will give you a decent whack of a capital gain. Suddenly moving out is disruptive unless you are young and single. But then you are unlikely, statistically, to be in this demographic class. Besides, as they are generally shoddily built, units are not great to live in. And strata fees on these things are horrendous.

    By the way, clearance rates have slowed down on the harbour. This has had a sideffect: there’s a shortage of rental property.

  • hc

    FXH, There is such a database for Victoria – a colleague of mine has used it to compile home price indices.

    If deals look shonky won’t buyers take their time? I don’t think that’s it.

  • rabee

    I don’t know Harry.
    But what happens to excess supply when there is an unanticipated demand shock and supply is inelastic?

  • FXH

    hc – I was suggesting that there is a bit of shonkyness on both sides – buyer and seller and therefore it might be in everyones interest to seal the deal quickly. Both sides knowingly participate in the shonk.

    I know there is a list of house prices but its only available on (pricey) subscription to those o fsimilar ilk that can afford it – real estate agents and tax eating academics. 😉

    A small amount of government $ could make it freely available on the net and perform a great service to the market.