Auction liquidation rate: buy now or sell?

With the coronavirus and Australia in recession, understanding auction close-out rates and other metrics can help you better prepare for a time of uncertainty in the housing market.

Auction liquidation rates have been just one of the real estate market indicators influenced by pandemic foreclosure conditions in 2020. Liquidation rates have seen a drop when on-site auctions and property inspections have been halted at various times and locations, including Melbourne more recently, to help curb the spread of the coronavirus outbreak.

Customs clearance rates have been below average since early July, according to CoreLogic, due to a substantial increase in withdrawn auctions in Melbourne, which has been hit by a second wave of the virus. Real estate analysts said with declining consumer confidence as well, this meant that home buyers and sellers could pull out.

But what does a drop in auction liquidation rates mean and how might it inform a potential buyer’s decision at a real estate auction? We will take a look.

What is an auction liquidation rate?

An auction liquidation rate is an indicator of the state of the current real estate market, especially those that are being auctioned. The rate is expressed as a percentage of the auctions that led to a successful real estate sale, and can be used to help determine if the market is in favor of buying or selling a property.

A liquidation rate of around 80% is generally considered “high” and could indicate that the demand from buyers to purchase a property is greater than what is currently available in the market. This rate is considered a “hot market” for those looking to sell.

On the other hand, a low liquidation rate around 60% or less suggests that buyer interest at auctions is low and home prices are falling. This market climate is perceived as favorable to those who wish to buy.

Figures released by CoreLogic on August 10 showed that 65.9% of the 1,160 homes slated for auction the previous week in capital cities have been sold. To give an idea, the three months leading up to June saw auction close-out rates in combined capitals drop from 62.5% in the March quarter to 47.9%, which was the lowest level since December. 2018. The liquidation rate started to improve somewhat in June once. on-site auction restrictions have been relaxed.

How are auction closeout rates calculated?

The auction liquidation rate shows the percentage of properties auctioned for each week or month and is calculated based on auction results by state or city. The calculation is usually the number of properties sold divided by the number of auctions held or properties listed for auction. The number of properties “sold” may also factor in those that were sold before or after the auction when calculating the rate, although this may depend on the real estate agency calculating the liquidation rate.

Traditionally, customs clearance rate data is calculated on a Saturday evening, so the results directly reflect the day’s results and can be published in Sunday newspapers and publications; however, postponed auctions or withdrawn properties may affect calculations. For example, some real estate organizations may include properties sold a day or two after the auction in the liquidation rate, but classify all sales after that as private, rather than sold under auction conditions. Others may post a preliminary clearance rate on Saturday evening with as many results as possible for the day, before finalizing the rate a few days later. This means that auction liquidation rates can vary depending on the real estate agency.

What can affect the auction liquidation rate?

The main point of difference between the different auction liquidation rates for the same period is the method of calculation and the data used by the individual real estate organization, in particular the results classified as “sold” and the total number of auctions. Auctions can be unpredictable and some possible outcomes, other than sold under the hammer, are:

  • The property is sold before the auction
  • The property was auctioned off, but sold in negotiations shortly thereafter
  • The property remains unsold after the auction
  • The property is withdrawn from the auction
  • The auction is postponed to a later date

Other external factors that may affect liquidation rates include current interest rates, availability of credit, and the location of the auction and the property, including whether there is a certain number of auctions. competing on the same day. Sporting events, religious holidays and the weather can also influence the rate.

Coronavirus lockdowns, for example, have had a role to play in reducing auction close-out rates in Melbourne. The number of homes auctioned in Melbourne fell sharply recently due to the latest foreclosure, according to CoreLogic, but withdrawal rates weren’t so bad this time around (18% in the week ending 9 August) compared to the previous lockdown period in April and early May (65% maximum in the second week of April). Melbourne’s customs clearance rate was 55.1% last week, up from 72.3% in the same period last year.

What is a buyer’s market and what is a seller’s market?

A buyer’s market usually means there are more homes on the market than buyers, which slows the increase in selling prices and can cause prices to drop. A buyer’s market usually also means that homes spend more time on the market than usual, which reduces the urgency to buy.

A sellers market, on the other hand, means that the number of people looking to buy exceeds the number of properties on the market. This means that homes are generally selling faster, prices are holding steady or rising, and there is greater urgency and higher demand among buyers.

A balanced market indicates that buyer demand is roughly equal to the number of homes available on the market.

What are the other real estate market indicators to watch?

If you hope to have a good understanding of the real estate market before you buy or sell, you may want to look beyond the auction liquidation rate. Here are some other key metrics to watch out for:

  • Property values ​​in the area you are looking to buy, especially medium and long term trends
  • Market Days (DOM) which indicate how long properties have been listed, with a lower DOM often signifying a more active property market
  • Rental yields can help give you an idea of ​​how much income or rent a property could earn, which could help with loan repayments.
  • Vacancy rates can also give you an idea of ​​rental activity. High vacancy rates, for example, can mean that you have a hard time finding a tenant if you are considering renting out the property.

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Image source: King Ropes Access, Shutterstock.

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