This appears to be a sign the property market is improving. But how much can we trust it?
Auction clearance rates are only a good clue to the property market if you understand what you are looking at.
The first thing to know is clearance rates are seasonal. Just as there is football season and cricket season so there is an auction
season. More homes are auctioned in spring than at any other time. The
variation in the number of homes up for sale affects the proportion of
them that gets sold. At the start of the year, auction numbers are
lowest and auction clearance rates are high, as the next graph
shows.This chart shows the auction clearance rate in blue, and the
number of auctions in grey. The number of auctions drops to roughly zero
each January. Just after that, as the first few auctions of the year
commence, the clearance rate goes up.
You can see the pattern each year — the blue line bumps up as the year starts. Clearance rates rise higher than their level at the end of
the preceding year. So it is dangerous to compare March clearance rates
with December. Just because auction clearance rates are higher now
doesn’t tell us much about what they will do in the rest of 2019. They
could keep rising, perhaps back to levels that make house prices rise.
But they could also fall.The second risk of relying on clearance rates
is what they are not telling you. The rate explains what share of houses
got sold. But it does not explain how many were up for auction. That
can give a misleading sense of the health of the property market.
Weaker prices in 2019 have meant far fewer vendors are willing to take the risk of selling. Auction volumes in 2019 are well below 2018
levels — just 12,700 homes have been auctioned in the past six weeks
compared to 17,200 in the same six-week period in 2018. That’s about 35
per cent more in 2018 than 2019.
The reality is that much less trade is happening — fewer houses are changing hands. And the reason for that is mostly vendors.People selling
their home often have an idea in mind of the price they want to sell
their property for. They can get stuck on the idea they must sell house
for a certain price — perhaps the same price the neighbours got in late
2017. This is called anchoring bias, because the price they have in mind
is like an anchor that tethers them to the spot. If they sell for less
than their anchor price that feels like they are making a loss.
Anchoring bias is why the property market changes price more slowly than the share market. People who bought houses are more likely to have
an anchoring bias than the algorithms that buy and sell shares. As
property prices fall, it will take time for the anchors to move. Some
homeowners might simply never sell, preferring to hold onto a property
for however long it takes for prices to recover, even if that doesn’t
really make sense.
The anchoring bias is one reason why the clearance rate is a good guide to future prices. If sellers just took the best offer they could
get, the clearance rate would always be near enough to 100 per cent. It
is that unwillingness to sell at auction that keeps properties on the
market afterwards. And when enough owners are unwilling to sell, the
stock on the market keeps building up, and the game gets easier for
buyers. That’s why clearance rates can be a guide to future prices.
The big question now is whether all the homeowners who didn’t sell at auction at the start of the year, and all the people who didn’t even
put their property on the market yet will change their mind. Spring
auction season is only six months away. Will we get a rush of sellers?
And will buyers come out to meet them? Watch this space to find out.
