The truth behind rising auction clearance rates in the Sydney property market – some important lessons for buyers and no wonder the State Government is crying poor!

November 29th, 2012

Introduction

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Apart from upbeat mainstream reports of a sustained improvement in auction clearance rates and the Reserve Bank of Australia’s decision on 3 October 2012 to reduce the official cash rate by 0.25%, the rest of that month looked and felt perfectly uneventful.

In a continuation of the theme we discussed in the last CurtiseCall, our comparison between the performance of the Sydney property market in October 2012 with the same month last year reveals that all was not as it seemed between $1 million and $1.5 million and even more so above $1.5 million.

Some of the numbers are as breathtaking as their conclusions are inescapable. For ease of reading, the most pertinent rows are highlighted in the following tables.

Methodology

The source of the data analysed below is Australian Property Monitors. While such data is never perfect, it remains one of the most comprehensive resources with which to identify trends in Sydney’s property market. Covering 894 transactions in October 2011 and 434 in October 2012, this body of data is also a statistically significant sample in its own right.

The current article has isolated all reported purchases between $1 million and $1.5 million and above $1.5 million in the months of October 2011 as well as October 2012 in the Local Government Areas (LGA) of City and East, Inner West, Lower North Shore, Upper North Shore and South.

Our analysis is summarised as follows:

$1 million – $1.5 million

Number of purchases Turnover Median auction price Properties purchased at auction Auction clearance rates adjusted for properties withdrawn prior to auction
October 2011 466 $490,412,550 $1,195,919 116 51%
October 2012 296 $320,916,900 $1,214,611 171 77%
Change (170) ($169,495,650) $18,692 55 26%
Change % (36) (35) 1.5 47 51

Above $1.5 million

Number of purchases Turnover Median auction price Properties purchased at auction Auction clearance rates adjusted for properties withdrawn prior to auction
October 2011 428 $913,420,006 $1,885,000 50 32%
October 2012 138 $226,789,500 $1,835,000 62 61%
Change (290) ($686,630,506) ($50,000) 12 29%
Change % (67) (75) (2.6) 24 91

To ascertain the uniformity or otherwise of the trends across all LGA’s, we analysed the transactions in each LGA to expose the following:

$1 million – $1.5 million

  • with a 28% reduction, the Inner West contributed least to the reduced number of purchases between the two months whereas the Upper North Shore contributed the most with a 55% reduction
  • as to turnover, the Inner West again proved to be the most resilient LGA recording a modest 22% reduction between the two months with the Upper North Shore again contributing the most with another 55% reduction
  • at 19%, the City and Eastern suburbs made the smallest contribution to the increase in the number of properties purchased at auction while the comparatively burning auction rooms in the Inner West experienced the highest 59% increase during October 2012
  • the Upper North Shore real estate agents also really worked the auctions to record the leading 78% increase in adjusted auction clearance rates whereas with a 32% increase, their colleagues on the neighbouring Lower North Shore were the second least aggressive behind the stable Southerners at a mere 6%.

Above $1.5 million

  • the 24 City and Eastern suburbs properties purchased at auction in October 2012 accounted for 38% of such purchases across all of the LGA’s this article considered as well as a staggering 71% increase in the number of such purchases in that LGA between the two months
  • whereas the increase between October 2011 and October 2012 in adjusted auction clearance rates across all LGA’s was 91%, that figure on the Upper North Shore was 200%.

So, what does all this mean for those buying in the Sydney property market above $1 million?

The most striking feature of the above analyses is of course, the statistically significant inverse relationship between:

(a) the purchase volumes and turnover figures on the one hand and

(b) the number of properties purchased at auction and the adjusted auction clearance rates on the other hand.

While (a) is plainly a function of the now notorious de leveraging and improvement in housing affordability that has had an impact on both the supply and demand sides of the Sydney property market, (b) is a mercurial beast more difficult to understand.

In this article’s view, (b) can only be the result of selling agents and the media affiliates they feed deliberately using the auction process to prop up the market by disguising the real underlying trend which is an unarguable slowdown in activity especially above $1.5 million where, relative to the same month last year, activity has all but stalled.

For buyers, the real sting in the tail lies in the immaterial reduction in median prices across all LGA’s despite the underlying collapse in turnover. That is a gravity defying outcome which exposes the effectiveness of this strategy from the sellers’ point of view.

For would be buyers, the lesson is simple: boycott auctions or at least do not attend them unrepresented.

For an illustration of the risks involved, readers need go no further than the sale this month of 9 Harley Street, Alexandria where, bowled over by interested buyers, the skilful selling agents on 27 October 2012 secured a near record breaking $1.62 million at auction.

Hopefully the buyer there knew that in a similar scenario played out just around the corner on 1 May 2010, the attractive 11A Jennings Street, Alexandria was driven up at auction to $1.110 million; only to be sold two years later on 23 June 2012 for $1.095 million.

And as for the increasingly unpopular New South Wales State Government whose stamp duty coffers have inevitably been depleted by these huge slowdowns in turnover: go ask the Commonwealth!