Clearance rates provide a quick insight into the state of the market but the question remains if it could holistically gauge the overall housing demand.

Clearance rates typically indicate how successful auctions are, as they refer to the share of the auctioned properties sold in a particular period, usually on a weekly basis.

How auction clearance rates are calculated

The most typical way to calculate the auction clearance rate is by dividing the number of properties sold during auction days and the total number of properties listed for auction over the period.

(Properties sold at auction / Total number of auctions) x 100 = Auction Clearance Rate (%)

Most platforms like Domain, CoreLogic, and SQM Research usually calculate clearance rates after Saturday auctions, reporting the numbers by Sunday. However, it is important to note that these platforms have several ways to calculate clearance rates.

Some variations of the formula are the following:

[(Sold at Auction + Sold Prior to Auction) / (Total Number of Auctions + Properties Withdrawn)] x 100 = Auction Clearance Rate (%)

This variation of the clearance rate formula includes sales prior to auction as part of the overall sales. It also considers the number of properties withdrawn in the auction as part of the overall supply.

[(Sold at Auction + Sold Prior to Auction + Sold After Auction) / Total Number of Auctions] x 100 = Auction Clearance Rate (%)

For this variation, both the number of sales before and after the auction events are calculated in the overall sales, which will then be divided by the total number of auctions.

What do clearance rates tell us about the housing market?

Buy Your Side founder Michelle May said auction clearance rates are a key market indicator that show buyers and sellers the current dynamics of the housing market.

“In markets where auctions are the primary mode of sale, like Sydney, the auction clearance rate is the most common piece of data used to determine whether it's a buyers' or sellers' market,” Ms May told Your Mortgage.

“In general, a high auction clearance rate indicates strong buyer demand making it a seller’s market.”

For instance, if a market has a clearance rate of over 60%, it will be considered a seller’s market.

However, Ms May said this may not always be the case as this could include sales prior to the auction event.

Sales before auction — what does it mean?

As mentioned earlier, other ways of calculating clearance rates include the number of sales that pushed through prior to the actual date of the auction.

Ms May said this could distort the clearance rate, making it appear that the market is hot when in fact, sales prior to auction could mean several things.

“One of the most important things to understand here is that when a property is sold before auction, it is sometimes because the vendor or their agent feels like demand is waning, and they want to secure the sale,” she said.

“In some cases, it can be a distress sale, however it can also be the other way around. It could be a knockout offer that has been made, which has caught out the other buyers who cannot compete that quickly, and at that level.”

There are also cases when agents are compelled to secure that one bid rather than risk disappointing auction results especially if the property has generated little interest.

“A third reason may be because the vendors have already bought or have their eye on a property to buy and want the surety of the buyer locked in,” Ms May said.

“One cannot underestimate the selling agent's motivation - they may typically sell the vast majority of their stock prior to auction as they are a volume agent or deal-doers.”

Can clearance rates be used to measure the market?

Ms May said while auction clearance rates give a glimpse as to how the market is performing, it does not holistically paint a vivid picture of the market.

“Without a doubt, they offer a quick insight into the state of the market. However, they shouldn’t be the only data you rely on when deciding when to buy a property,” Ms May said.

“It always pays to dig a little deeper and knowing where to look will give you the best chance of securing your dream property for a reasonable price.”

The number of bidders is a good indication on how hot or tight the market is.

Individual factors like the share of properties sold prior and after the auction and the days-on-market can also be considered good indicators.

In an analysis, Raine & Horne executive chairperson Angus Raine said the number of days-on-market provides a better “gauge to the health of the market”.

The days-on-market measure refers to the time it takes for a property to complete an offer to purchase. This commences by the time a property is listed in the market.

“If the days-on-market are short, then it's appropriate to label it a seller's market,” Mr Raine said.

“In contrast, in the dark days of the GFC a decade ago days-on-market for housing in some regional centres were closer to 350 days and these were markets favouring buyers.”

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