How are auction clearance rates calculated?

The auction clearance rate is one of the most timely measures of the state of the housing market.

It measures the percentage of homes that sold at auction.

A preliminary clearance rate is released each Saturday night, after as many results as possible from that day’s auctions are tallied. A final result is calculated a few days later when all auction results are collected.

But how exactly is the clearance rate calculated? And why do you read slightly different results in different news reports?

The range of auction outcomes

Once a home owner decides to sell their property at auction, they face a range of possible outcomes.

The home could be:

• Sold under the hammer at auction
• Sold prior to auction
• Passed in at auction, but sold in negotiations soon after
• Passed in at auction, and still unsold afterwards
• Withdrawn from auction prior to the scheduled time
• Postponed to another date

To calculate a clearance rate, first we want to know to the total number of auctions scheduled, compared to how many homes listed for auction were actually sold.

We consider any homes that were sold under the hammer, or sold prior, to be sold at auction.

It’s not uncommon for a home to be passed in at auction but sold soon after, although this won’t be included as a “sold” auction result for the purpose of calculating a clearance rate.

Other real estate bodies might include homes sold after auction, which can make the clearance rate look higher.

Then we want to know how many auctions were listed altogether.

That includes auctions that went ahead on the day, auctions that didn’t go ahead because the home sold prior, and auctions that didn’t go ahead because the property was withdrawn from auction – either pulled from the market completely or switched to private sale.

Other bodies might calculate a clearance rate that excludes withdrawn auctions, which can also make the clearance rate look higher.

Here’s the equation to work out the clearance rate:

(Sold under the hammer + sold prior)/(Total reported auctions)

Which is then presented as a percentage.

Total reported auctions includes every possible scenario: sold under the hammer, sold prior, sold after, passed in or withdrawn.

Why does the auction clearance rate get updated mid-week?

The process described above is used to work out the preliminary clearance rate on a Saturday evening.

It’s the most timely measure of what happened in the market that day.

The auction collections team is hard at work on a Saturday to collect as many results as possible.

Usually, there’s a percentage of results that take awhile longer to collect from the selling agents.

Once more information comes in during the week, a revised clearance rate is published on Thursday. It’s often a few percentage points lower given it’s the best results that tend to get disclosed first.

Domain also publishes a monthly auction report card, with a measure of the clearance rate over the past month as well as median auction prices and other detailed auction statistics.

What does it mean if the clearance rate moves up or down?

A high clearance rate, say 80 per cent plus, shows that we’re in a seller’s market, with strong competition from buyers and properties likely to sell under the hammer or in advance.

Even at a 70 per cent clearance rate, this is still a seller’s market as annual price growth is likely to be about 10 per cent – not insignificant for someone trying to get into the property market.

A low clearance rate, below 60 per cent, indicates a buyer’s market, with buyers possibly able to be more choosy and purchase at an attractive price.

This is why clearance rates are watched so closely.

Particularly in Sydney and Melbourne, the clearance rate is a leading indicator of price growth.

When it’s above 60 per cent, prices are likely to be rising, but when it’s below 60 per cent, prices are likely to be falling.

What if a lot of auctions are withdrawn?

If a lot of auctions are withdrawn, this tells us sellers are feeling unsure about whether they will be able to achieve a sale at auction.

Perhaps they think there aren’t enough buyers interested for the home to sell under the hammer, as there won’t be enough competition.

The levels of withdrawals offers an insight into vendor confidence – if they pull their home from auction, this may indicate they think the market is struggling.

When prices are growing, the proportion of homes sold prior to auction tends to increase and withdrawals tend to decrease. Buyers might make a big prior offer to try to snap up a home and avoid the competitive nature of an auction.

When prices are falling, it’s the opposite – fewer homes sell prior and more are withdrawn from auction.

When the federal government banned public auctions as a social distancing measure to slow the spread of COVID-19 in March, vendors had only a matter of days to decide whether to try out a virtual auction, or switch to private treaty. Many opted to withdraw their homes from auction. The large number of withdrawn auctions resulted in a very low clearance rate.