For better or worse, a heavily relied upon leading indicator of property prices is the auction clearance rate. The clearance rate is a simple measure of the proportion of residential properties that sell when auctioned. A high clearance rate (more than 70%) implies that housing demand is strong, and prices will probably rise. By contrast, a clearance rate that falls below 70% tends to mean that vendors are pricing their own properties above what the market is willing to pay and is a useful portent that prices will fall. It is for this reason that the weekend papers slavishly quote clearance rates every week. A problem arises, however, when influential papers such as The Age in Melbourne quote data supplied by bodies such as the Real Estate Institute of Victoria, which are intentionally miscalculated to give the appearance of a stronger market than is actually the case.
Yesterday, a percipient Crikey tipster questioned, “why is the Real Estate Institute of Victoria allowed to peddle their unreliable data to paint a completely different picture of the Melbourne property market? Taking into account ‘no-result’ auctions over the past five weeks, the clearance rate is falling — now to below 60% — yet the figures the REIV present indicate a clearance rate at more than 70%. The market isn’t as balanced as they would have you believe. Anyone who has studied investor behaviour knows people are more comfortable to move with the herd and reassurance that others are buying will influence their choices. The misinformation is deliberate as the REIV attempts to massage the market and stop buyers making informed decisions”.
Correct data is ironically quoted in another Fairfax paper — the Australian Financial Review, every Monday. Without fail, the AFR clearance rate statistics (which is provided by Australian Property Monitors), alleges a lower clearance rate than the figures claimed by the Real Estate Institute. This is largely because the REIV tends to ignore the substantial number properties that are not reported — almost all of those no-results actually have a result — that is, they are passed in’.
Crikey recently conducted its own survey of clearance rates in Melbourne (long considered the auction capital of Australia). In a weekend in which 519 properties were auctioned and the REIV reported a 68% clearance rate. This result was duly reported by the Sunday papers. The only problem is that figure was not correct.
Crikey’s own clearance rate study was based on the specific 228 properties that were listed in Fairfax’s Domain auction. While not an entire universe of auctions, it was a large enough sample to determine a satisfactory result and more importantly, was a fully self-contained set of data. Of the 228 properties that were listed for auction, 125 sold — equating to a clearance rate of 54%. That assumes the 38 properties that were not mentioned on Sunday, all failed to sell. Even if all the unreported properties were sold, the clearance rate would have been 65% — still below the REIV figure.
That weekend, Australian Property Monitors reported to the Financial Review that Melbourne’s clearance rate was 60.8% (a figure broadly in line with Crikey’s calculations). Substantially different to the result claimed by the REIV and reported by The Age.
The misrepresentation of clearance rates by real estate bodies is certainly not a new phenomenon. Back in 2007, Crikey reported that the REIV had undertaken similar jigging of auction numbers. The criticism drew a bizarre response from REIV CEO Enzo Raimondo. Similarly, respected real estate analyst Louis Christopher was effectively forced out of his role as CEO of APM back in 2006 after he said:
In my opinion [providing misleading data] is grossly unethical behaviour. Real estate news and information should be freely available, independent and not subject to a conflict of interest. And agents should be free (and obligated) to give data back to anyone and not be a pawn of anti-competitive behaviour.
Christopher had promised that in the interests of disclosure, APM intended to publish in full “all Melbourne auction results as one report on domain.com.au and on homepriceguide.com.au ahead of the print publications”. Fearing loss of real estate revenue, APM placed Christopher on leave and he soon departed to form the successful property research business SQM Research. (Ironically, a proportion of the revenue that Fairfax was trying to protect has been lost anyway, courtesy of Antony Catalano’s The Weekly Review).
High property prices benefit only a small section of the community (largely real estate agents, newspapers and owners of multiple investment properties) — it is no surprise that these privileged few are keen to ensure that the property bubble remains intact by all means necessary. The problem is many less-sophisticated property buyers, especially first-home buyers, are convinced to purchase property based on flawed data (and use very substantial amounts of debt). Leading newspapers have a responsibility to ensure that the information they provide to readers is as accurate possible — in continuing to use obviously flawed real estate institute data, our major papers are failing young property buyers.
As for believing what real estate agents claim, as Warren Buffett once noted, you should never ask your barber if you need a haircut.