18 March 2019

Educating clients about clearance rates: why auctions work

Auction clearance rate data is reported weekly in almost every major news outlet and is used to measure the strength of the market.

Issues arise, however, when clearance rates are used to measure the effectiveness of auction as a method of sale.

To clarify the correct use of clearance rate data, we asked auctioneers Clarence White and Damien Cooley for their take on clearance rates and why auction is still the most effective method of sale.

What is a normal clearance rate?

While a commonly reported clearance rate is between 50 – 60 per cent, White says there is no such thing as a “normal” clearance rate.

“Different market conditions will always produce different clearance rates, and what is a ‘normal’ market?” he says.

“Markets are cyclical. At any given time, the market has certain characteristics. Sometimes the market is gaining value and sometimes it is losing value. Sometimes values are stagnant. The only constant is the cyclical change that occurs in the market.”

How does the variation of clearance rates affect people’s opinion of the effectiveness of auctions?

Both White and Cooley agree that clearance rates are an indication of the temperature of the market.

What concerns them is the perception that a low clearance rate means auctions are less effective as a method of sale than private treaty.

“Auction clearance rates are a measure of the strength of the market. They are not a measure of the effectiveness of the method of sale,” says Cooley.

“Put simply, auction is a marketing strategy used to sell a property in a reasonable period of time for the best possible price.”

White agrees: “To the lay observer, low clearance rates can create the false impression that auction represents a risky or less successful way to sell property.

“This is because the average person takes them at face value. They mistakenly assume that a 50 per cent clearance rate means only a 50 per cent chance of selling their property if they choose the auction process. This, however, could not be further from the truth.”

White says the total percentage of properties ultimately sold via the auction process (be that before, at or after the auction) is extremely high and significantly higher than reported clearance rates.

“Clearance rates don’t really paint the whole picture when it comes to utilising the auction process to achieve a successful sale,” he says.

How can agents dispel fear instilled by low clearance rates

White says it’s important that agents educate vendors that clearance rates only represent a percentage of properties sold at market at any given time.

“Clearance rate data fails to illustrate the total percentage of properties that successfully sell via the auction process,” he says. “It also fails to illustrate the average time it takes to sell an auction property versus a private treaty property in the current market.

“We know that statistically auction properties are selling faster on average than private treaty properties. However, this is an under-reported fact.”

Cooley agrees: “It is widely recognised that auction outperforms private treaty by approximately half in the days on market stats,” he says. “This is something we have tracked for years and it never changes much. In fact, we find that quality agents tend to do more auctions when clearance rates are below 50 per cent.

“Agents need to believe in the auction process in order to sell it to a vendor. I strongly believe a seller lists with the agent they feel will best represent their interest and, as such, trust their opinion on how to achieve this.”

Cooley says agents simply need to prove to vendors that auction outperforms every method of sale available in price and in days on market.

“Show case studies that illustrate that auction gives you an opportunity to create a competitive environment,” he says. “While a premium may not be achieved through auction, at least you give the vendor the opportunity for it to be achieved.”

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