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Adding to the slew of evidence that the real estate market is entering the downturn phase, a new report revealed that profit-making resales across the country fell for the first time in 18 months.
CoreLogic’s latest Pain and Gain Report showed that 93.7 per cent of property resales made a profit during the March 2022 quarter, down from the 94 per cent recorded in the December 2021 quarter.
According to the property data provider, the March 2022 quarter marks the first decline in national profitability rates from the three months to August 2020.
Out of the 106,000 dwelling resales analysed, data showed that vendors made a capital gain of $290,000. Overall, the resale profits across the nation reached $30 billion during the period, down from $38 billion recorded during the last quarter of 2021.
Meanwhile, the median losses on resales through the quarter stood at -$33,000.
CoreLogic head of research Eliza Owen stated that while the decline in the incidence of profit-making sales was only marginal, the figures were an indication “changing market for sellers”.
“The figures align with other key indicators such as the slowing growth rate of values, the increasing time it takes to sell a property and a fall in sales volumes at a time when access to credit has become harder and interest rates are on the rise,” the expert explained.
With several capital markets posting the first monthly decline in value since September 2020 in May, the expert advised resellers to brace for further losses in the coming months.
“Against a backdrop of rising interest rates, tighter credit conditions and affordability pressures we are likely to see the instance of nominal gains from dwelling resales erode throughout 2022, which will have an even greater impact on buyers who have entered the market more recently,” Ms Owen stated.
Ms Owen cautioned that the cash rate tightening cycle, which began in May, is likely to reduce the flow of credit towards housing, which will impact prices and profitability.
But on the upside, she noted that the price gains through the current housing market upswing have been very strong, and it may only be recent buyers who will take a loss when selling compared to those who purchased before the upswing.
“Even in a declining market, the extent of Australia’s loss-making sales will largely be in line with future capital growth trends,” she surmised.
Capital markets drag on profit-making resales rate
CoreLogic highlighted that major capital cities are driving the drop in profit-making resales, falling 60 basis points during the period to 93.3 per cent.
Despite the NSW capital seeing a notable decline in the rate of profit-making resales, the harbour city had the highest median dollar-value gain from these transactions at $415,000.
On the one hand, the average profit gained from resales was lowest in at $119,000.
Data also revealed that vendors in smaller cities have the highest chance of raking in a profit from resales. Hobart had the highest incidence of nominal gains for the 15th consecutive quarter, clocking in with a rate of 99 per cent.
“Hobart dwellings have been in incredibly high demand over the past few years, being one of two capital cities – alongside Sydney – where dwelling values have doubled in the past decade,” Ms Owen stated.
The Tasmanian capital was closely followed by Canberra, with the chances of selling a house for a profit in the ACT capital at a record high of 98.8 per cent.
At the other end of the spectrum, the rate of loss-making sales was highest across Darwin (27.9 per cent) and Perth (15.6 per cent).
Meanwhile, regional areas continued to enjoy a high success rate, with the rate of profit-making sales lifting 10 basis points higher in the quarter to 94.2 per cent.
Across regional areas, Victoria had the highest rate of profit-making sales at a record high of 99.4 per cent. Meanwhile, regional Northern Territory (21.8 per cent) and regional Western Australia (17.4 per cent) saw the lowest average of profitable resale transactions during the period.
The report also noted that West Australian regional markets continued to see an improvement in profitability over time as housing market conditions remained resilient, though this trend was more volatile across the Northern Territory.
Houses v units
House resales had a higher chance of profit (96.2 per cent) than units (88.3 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 50 basis points.
Over the period, house resale median gains were $370,000, compared to $173,000 for units. The difference in losses was also greater for units (-$36,000) compared to house resales (-$29,400).
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.
She further explained the downward trend, stating that macro-prudential 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.
Hold periods to play a major role in resale profits
With the price declines across the market signalling the higher probability of loss-making resales in the coming months, Ms Owen says the hold periods will continue to play an “important role” for resellers.
Nationally, the median hold period for profit-making resales stood at nine years during the latest quarter, longer than the 8.8 years typical hold period for resold properties in the December 2021 quarter.
“As has been consistent with previous reports, higher hold periods have typically yielded higher nominal capital gains from resale,” Ms Owen noted.
For properties that were held for a period of 30 years or more, resales resulted in median gains of $781,750, according to CoreLogic.
However, CoreLogic also reported that properties held for a minimum two-year period also raked in an average of $170,000 when resold, indicating that hold periods have a weak inverse relationship with capital growth rates.
But Ms Owen stated that as the market values continue to retreat, more owners may be incentivised to hold for longer in order to cash in on their long-term gains.