The great Australian love affair with real estate has started to see its first signs of turbulence over the last few months. As the official cash rate rose for the first time in 11 years to 0.35 per cent, many homeowners are coming to grips with the reality that their variable interest rates can go both ways.
Markets move quickly, and there’s been little surprise to see that the first number to be hit (before property prices) is auction clearance rates.
Ray White’s national clearance rates in May currently sit at 57.4 per cent, this is down 18.3 per cent from the same time period last year.
These numbers do not only review the auctions that went under the hammer; but also include properties listed for auction that were either sold prior, withdrawn or converted to private treaty.
It’s no surprise with such a dramatic shift that questions are starting to be raised about whether the auction method is still the right move for vendors to get the best outcome for their sale?
When it comes to addressing this question, we first must consider what factors are most important to a vendor. In most cases, they’d likely tell you they want:
- To get a sale
- At the best price
- In the least time
- With the least hassle
Naturally when clearance rates start to drop, the assumption is that auctions no longer ‘work’ in a declining marketplace.
Agents that jumped on the auction band wagon during the peak of the market are always the first to jump off the wagon when things get tougher. But before you let clearance rates in isolation dictate your decision on what is the best process for you; make sure you look at the full picture and what the data is telling us.
What method is more likely to achieve a sale?
The problem with using clearance rates in isolation as a success indicator is that they only show success at a singular point in time.
Clearance rates isolate the auction day but fail to paint the story of an entire campaign.
To compare apples with apples, we would need to first compare what is the campaign success rate of auction vs private treaty, which would include a successful sale post auction within a typical agency agreement of 90 days.
When reviewing the data over the course of a full campaign, auctions are still selling with considerably higher clearance, over 30 per cent – 40 per cent higher in fact over the Ray White network.
This is a reflection of quality stock processing.
The auction campaign gives three chances for a vendor to sell; prior to the auction, on the day or post.
The campaign requires the agent and the vendor to work within a framework which ultimately keeps them accountable, creates urgency and best educates market value.
What method sells faster?
In a declining market, the most costly factor of a campaign is time on market.
Most regions have started to see early stages of price pressures and 3-5 per cent price reductions in most of our capital cities.
With predictions of further price pressures in coming months, clearing stock fast becomes critical to protecting asset values.
The argument for private treaty is certainly that if it was priced correctly on day one then you’d likely have a sale on day two.
However, if property was always priced correctly then there would be little need for a real estate agent in the first place.
Once again, clearance rates are an interesting indication of success at a point of time.
Most auction campaigns in this market place are running for around 28 days before auction day.
To truly compare the methods would also require you to review what percentage of private treaty stock has sold at the same point in time.
It’s short sighted to suggest that just because auction clearance has decreased at day 28, that private treaty days on market wouldn’t be impacted the same, if not worse by the market shift.
In fact, the data shows over all our biggest shops that typical clearance rates of private treaty stock by day 28 are considerably lower than that of auction and even more so in the days following auction day.
The deadline of the auction day creates the urgency for action; action for interested buyers to reveal themselves and action for sellers to be priced in line with the market.
Even when a property fails to sell under the hammer, statistically the likelihood of the deal closing within the weeks post improves considerably as the vendors are more aware of market prices and agents have identified the buyers most likely to buy.
What method creates the least hassle?
For most sellers the most valuable asset during a time of uncertainty is certainty.
And few things are more certain than an unconditional contract.
As interest rates go up, lending capacity goes down and pressure on bank valuations continues to be a struggle in many marketplaces.
Deals falling over due to changes in buyer circumstances and light bank valuations continue to cause some of the most stress throughout a campaign.
The cost of a deal falling over throughout a campaign is more critical than simply the loss of the one buyer; but furthermore the cost of more time in market, loss of momentum in the campaign and the threat of more competition of new listings in the market for buyers to choose.
It takes a highly skilled agent to convince buyers in the current market place to place unconditional offers on private treaty. An auction campaign removes that objection.
With declining clearance rates it’s easy to fall out of love with the auction process. True auction advocates understand that auctions, whilst fun in a cooking market, are actually best designed for more challenging conditions.
The path of least resistance is to revert back to a private treaty sale.
They require little accountability, no deadlines and little process.
Unfortunately the data suggests they also provide fewer sales in more time too. The choice is yours.