To auction, to auction?

To auction, to auction?Across the combined capital cities, auction clearance rates have been trending lower since the middle of April of this year. The downwards trend in auction clearance rates foreshadowed the cooling in capital gains across the residential markets, with the RP Data-Rismark Home Value Index showing that capital city home values started falling about a month and half later.

Despite the fact that clearance rates have been easing since April, the volume of properties being taken to auction has been substantial. Auction clearance rates most recently peaked at 75% during the week ending April 18, 2010.

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Since that time there has been more than 45,000 capital city properties taken to auction. The volume of properties going to auction since that time to the week endingNovember 7, 2010 is greater than the volume of auctions undertaken between the corresponding week last year and the end of 2009, highlighting that auction activity this year has been greater than last year.

Given this, the question must be asked, why are so many people taking their properties to auction at a time when there are fewer buyers, more properties available for sale, falling auction clearance rates and slowing levels of property value growth?

An auction generally achieves much greater exposure than a private treaty sale as vendors are typically willing to spend more money on advertising. Also, some people suggest that an auction is the best way to achieve top dollar; if you look at the most expensive sales each week across the country, these have usually been taken to auction. On the flipside of the argument, with clearance rates recorded at just 52% over the last week, the odds of selling a home at auction have slimmed markedly compared to the same time last year. Of course, many unsuccessful auctions are later sold through direct negotiations with the bidders, however the slowdown in the auction market is likely to prompt more vendors to consider alternative selling methods such as tenders and private treaty.

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Although nationally auction clearance rates were recorded at 52% last week, the larger auction markets of Melbourne and Sydney are recording a superior performance, but only just. Melbourne’s auction clearance rate peaked during the week ending 11 April 2010 at 85%, last week it recorded a clearance rate of 55%. Sydney’s clearance rate peaked at 83% during the week ending 31 January 2010, last week the city recorded a clearance rate of 54%.

Looking at data which details the number of properties advertised for sale by auction as a proportion of total properties advertised for sale shows that typically, auctions are becoming a more popular way of selling a property. This is likely due to the strong auction clearance rate environment during the second half of 2009 and early 2010.

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As a proportion of total listings, Melbourne (41.1%), Canberra (35.5%) and Sydney (28.9%) are by far the most popular markets for auctions. Five years ago, auction listings accounted for just 30.9% of all Melbourne listings and 15.5% of all Canberra listings meanwhile, although the proportion of auction listings in Sydney has increased it has not been as significant as that recorded within the other two cities.

Outside of these three cities, auction markets are relatively minor and account for less than 15% of total listings. Also, whilst the proportion of auction listings has ramped up within Sydney, Melbourne and Canberra, the other capital cities have recorded relatively minimal change in the proportion of listings over the last five years.

Not surprisingly all of the most significant auction markets are located within areas close to the centre of capital cities and dominated by regions with unique and expensive properties. As the table details, these regions record a much greater volume of properties being taken to auction than the total across the capital cities.

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Overall, the property market has been performing quite well for much of the last 12 months and given this it is no real surprise to see that auctions have been a popular method of sale. With more stock now available for sale and fewer buyers it may be the case that more vendors will look at alternative selling methods. Vendors who prefer to stay with the auction process need to be realistic in their reserve prices and have a backup plan in case the auction is unsuccessful. This would normally involve direct negotiations with the highest bidder or other bidders and potentially a secondary marketing campaign focused on a private treaty or tender sale.

RP Data Research does not suggest one method of sale over another but in these tougher market conditions vendors must choose their method of sale carefully and look to differentiate their property from the rest.

Tim Lawless is the Director of Property Research at RP Data.

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