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CoreLogic’s latest Pain & Gain Report revealed that the number of loss-making transactions is on the rise, indicating that sellers during the three-month period to June may have missed their best window to secure peak profits in the previous quarter.
Upon analysing approximately 102,000 property resales that occurred in the June 2022 quarter, data showed profit-making sales plateaued at 93.8 per cent when compared to the previous three months.
The latest quarterly figures are down from three months to April, when the portion of property owners gaining profits from resales was at 94.1 per cent — coinciding with national dwelling values hitting their highest level during the year.
During the June quarter, the median nominal gain made on resales nationally was $270,000, while median losses were -$33,500.
CoreLogic head of research Eliza Owen stated that the latest report served as a “line in the sand” on when the housing market peaked and started to turn.
The expert noted that the April peak for both profitable resales and national home values aligned with the first of several sharp and consecutive rate hikes.
“The figures align with peak growth in our national Home Value Index and highlights the decline in the rate of profit-making sales, which has been largely influenced by an increase in the rate of loss-making resales in Sydney and Melbourne,” Ms Owen stated.
Sydney’s rate of loss-making sales rose 160 bps to 6.4 per cent, coinciding with a quarterly decline in home values of 2.8 per cent in the NSW capital over the period.
Meanwhile, the percentage loss-making property resales in Melbourne were up 50 bps over the quarter to 5.3 per cent, occurring simultaneously with a 1.8 per cent decline in the Victorian capital’s prices during the reporting period.
According to Ms Owen, the Reserve Bank’s recent monetary policy tightening — which pushed up the official cash rate to currently stand at 2.35 per cent following a five-month aggregated rate-rise cycle that kicked off in May — has led to a weakening in the home values in Sydney and Melbourne.
But she pointed out that there are still bright spots in the market, as residential resale results in some cities remaining strong with significant gains across almost all resales.
Based on the recent decline in house values through the end of August, Ms Owens expects the rate of profit-making sales to continue moving lower from its peak level in the coming months.
She also expects that the broad-based dwelling value declines in the coming quarters to limit profitability for sellers.
“As rates continue to rise, it is likely the rate of profit-making sales will continue to fall in the coming quarters,” she forecasted.
Smaller capital cities win big on reselling
The report isn’t entirely bad news for resellers, with strong resale figures still the prevailing norm in smaller capital cities including Canberra, Hobart and resource cities.
Hobart and Canberra topped the capital cities for the rate of profit-making sales, with almost 100 per cent of resales in both cities recording a nominal gain during the period.
Notably, the Tasmanian capital has recorded four consecutive years of vendors recording the highest rate of nominal gain across the greater capital city markets.
Meanwhile, regional markets continue to see an uptick in successful resales. The rate of regional property resales recording losses during the June quarter continued to trend lower, falling 30 bps to 5.4 per cent from March.
The figures are one of the lowest periods of loss-making resales since the three months to April 2008.
Ms Owen said the increase in profit-making transactions in regional markets coincided with dwelling values for the areas rising in the June quarter — defying the downswing trend across the country.
However, she also noted that regions have since followed the capital city markets into a relatively sharp housing market downturn.
Through July and August, regional Australian home values declined 2.2 per cent from a peak in June, which is likely to weigh on profitability in the regions going forward, according to Ms Owen.
Meanwhile, tree change and sea change markets continue to enjoy boosts in profitability, with only 1.9 per cent of resales in coastal and non-coastal lifestyle areas recording a nominal loss in the June quarter. The figures are down from 2.3 per cent in the three months to March 2022.
Ms Owen said this marked a record low for the rate of resales reporting a loss for the combined tree change and sea change markets.
“There were slight increases in the rate of loss-making sales across Geelong, the Gold Coast, Richmond Tweed and the Sunshine Coast, but these increases were marginal,” she said.
She said the shift in the profitability trend was expected, given that the same markets were leading the steep decline in value across regional Australia.
Houses v units
House resales across the country had a higher number of transactions booking a profit (96.5 per cent) than units (88.31 per cent) during the quarter, according to CoreLogic.
The rate of profitability for both sectors declined quarter-on-quarter, but the report noted that units recorded a steeper drop of 70 bps compared to the housing market’s drop of 10 bps during the period.
Over the period, house resale median gains were $370,000, compared to $173,000 for units.
Ms Owen attributed the house market’s strong returns to several factors, including the value associated with the land, as well as the solid demand of owner-occupiers for detached housing over the pandemic.
During the quarter, investors made bank from 90.9 per cent of resales, falling short of the 96.7 per cent for owner-occupiers.
According to Ms Owen, a surge in apartment construction activity between 2012 and 2017 was one factor that contributed to the lower rate of profitability among unit sales, particularly in Sydney, Melbourne and Brisbane.
She further explained the downward trend, stating that macroprudential changes to investment and interest-only lending conditions triggered a decline in investment demand for units between 2014 and 2017.
This turn of events, the expert said, compounded with nominal losses in inner-city markets where the majority of unit development had been concentrated.
In Sydney, for example, Ms Owen noted that the uptick in the rate of loss-making unit sales was likely due to an increase in investor stock being sold off.
“Resales data suggests a notable increase in loss-making unit sales across the Sydney council region, including in high-density city fringe markets like Waterloo, Zetland and Roseberry,” the expert said.
Melbourne’s steep decline in dwelling values had impacted the number of profit-making sales, particularly across the city centre, where more than a third of resales were sold for a nominal loss.
“Rising rates may be triggering more sales decisions among investors, contributing to the increase in loss-making unit sales across the city,” she said.
Longer holding periods resulting in heftier profits
The report also noted that longer hold periods were also generally associated with higher profits. For example, data showed property owners who divested after 30 years saw an average return of more than $800,000.
Nationally, the median hold period for profit-making resales stood at 9.0 years during the latest quarter, which placed the initial purchase date in the June quarter of 2013.
As Australian property values move through the downswing, Ms Owen expects median hold periods will increase as more recent buyers are less likely to sell in a downturn.
“The most recent housing market upswing, which took place between September 2020 and April 2022, saw a total increase of 28.6 per cent in national housing values,” she said.
While the feast period has led to substantial gains over relatively short hold periods, Ms Owen expects that resellers will not see the same results as the market continues to weaken.
“In the March 2022 quarter, vendors who sold after only two years were achieving a median gain of approximately $170,000. However, by the end of June, that median nominal gain made within two years of purchase had reduced to $150,000,” she stated.
[Related: Resilient unit prices take a hit]
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