This RBA chart shows why auction clearance rates are so important for house prices

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The signals to watch for falling house prices via Sydney and Melbourne auction clearance rates were pointed out byeconomists at Deutsche Bank in a report last week.

That focus on clearance rates, rather than overall supply and demand in a broader sense, is wedded in the reality that in markets, including property, the marginal player sets the price.

That is, if the house down the street sells above, or below reserve, is passed in or bought strongly, it has knock on impacts for the prices for the surrounding houses in that street and suburb, and then the next suburb along.

This relationship between clearance rates and prices is brought into stark relief by Graph 3.3 of the Reserve Bank’s latest Statement on Monetary Policy. It shows, in the sharpest detail why clearance rates are so important to house price movements, particularly in Sydney.

Clearly both Sydney and Melbourne are still experiencing price growth, but the sharp slowdown in clearance rates is pushing Sydney closer toward zero growth with the average of the last two week’s auctions at around 62%.

Melbourne is doing a little better, but it too is clearly slowing.

That’s a theme picked up by Malcolm Edey, the RBA’s assistant governor (financial system) who said in a speech today that “There is also some tentative evidence that sentiment may now be turning in the housing markets in the two largest cities. But it is much too early to be definitive about that. What we can say is that the risks in that sector are now being more prudently managed than they were a year or so ago.”

Prudence is good, but it’s also a euphemism for the heat coming out of the market.

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