The period of peak profitability has passed for the Australian property market

Australian sellers looking to cash in on the resale of their property saw the market spike back and forth in the June quarter, with data showing the number of loss-making transactions is on the rise.

The latest pain and gain report from CoreLogic, which analyzed around 102,000 property resales that took place in the June quarter of 2022, showed Australia’s profitable sales plateaued at 93.8% compared to the previous three months.

However, the quarterly rolling rate of for-profit sales showed that the three months to April hit a peak resale gain of 94.1%, coinciding with the height of national home values.

Eliza Owen, Head of Research at CoreLogic indicates that the April peak for profitable resales and national home values ​​is aligned with the first of several strong and consecutive rate hikes.

“This particular report from Pain & Gain provides a line in the sand and confirms when the housing market peaked and started to turn,” she said.

“The figures match the peak growth of our National Home Value Index and highlight the decline in the rate of for-profit sales, which was largely influenced by an increase in the rate of resales at a loss in Sydney and Melbourne. .”

Sydney’s loss sales rate rose 160 basis points to 6.4%, coinciding with a quarterly decline in home values ​​of -2.8% over the period. Melbourne’s share of loss resales rose 50 basis points in the quarter to 5.3% as home values ​​fell -1.8%.

“Multiple interest rate hikes have caused home values ​​to weaken in Sydney and Melbourne, but residential resale results in some cities remain strong with significant gains in almost all resales,” he said. she declared.

“Resales data suggests a notable increase in loss-making unit sales in the Sydney council area, including in high-density outlying markets like Waterloo, Zetland and Roseberry.”

The report isn’t entirely negative for sellers, with strong resale numbers still prevalent in smaller capitals including Canberra, Hobart and resource towns.

Hobart and Canberra lead the capitals in the rate of for-profit sales, each with 99.1% of resales making a nominal gain. Hobart has recorded four consecutive years of sellers registering the highest nominal rate of gain in major capital markets.

Ms. Owen said the improvement in some cities in the June quarter may reflect actions taken by motivated sellers who took advantage of a recent peak in home values.

National pain and gain

Nationally, the proportion of homes that achieved a nominal gain (96.5%) was higher than in the unit segment as a whole (88.1%). Investors saw nominal gains of 90.9% from resales, below the 96.7% for homeowners.

Longer holding periods were also generally associated with higher nominal earnings. Owners who sold after 30 years saw a median nominal return of over $800,000, while the median holding period of all resales during the quarter was nine years, which placed the purchase date initial in the June 2013 quarter.

As Australian property values ​​weather the recession, Ms Owen expects median holding periods to increase as more recent buyers are less likely to sell in a downturn.

“The most recent housing market recovery, which took place between September 2020 and April 2022, saw a 28.6% total increase in national housing values,” she said.

“This has led to substantial gains over relatively short holding periods. However, as the housing market continues to decline, the nominal gains made during this relatively short holding period have already begun to erode.” In the March 2022 quarter, sellers who sold after only two years realized a median gain of around $170,000, however, by the end of June, that median nominal gain realized within two years of buying had fallen to $150,000.

Houses vs Units

Homes and units saw an uptick in loss sales between the three months and April 2022 (April was also the month the CoreLogic Home Value Index hit an all-time high for homes and units at the national scale).

The rate of return in the real estate market has since declined by about 10 basis points through the end of the June quarter, and the rate of resales of units that made a nominal gain fell more rapidly to 70 basis points. base.

“The relative strength of home segment performance comes down to a few factors, including the value associated with land and the strength of homeowner demand for homes over the past two years,” Ms. Owen said.

“As noted in previous reports, the unit segment in Australia, particularly in the high-density and investment-centric centers of Sydney, Melbourne and Brisbane, saw an increase in construction from 2012 to 2017.

“However, macroprudential changes to investments and interest-only lending triggered lower demand for housing investment in 2014 and 2017. The combination of increased supply and lower Investment demand has contributed to weakening conditions in some of these markets.”

Regional markets

The Australian region’s resale loss rate continued to decline in the June quarter, dropping 30 basis points to 5.4% from March, marking one of the weakest periods for resales in deficit since the three months preceding April 2008.

Ms Owen said regional Australian home values ​​rose in the June quarter, bucking the national trend, but regions have since followed capital markets in a relatively sharp downturn in the housing market.

In July and August, the value of regional Australian homes fell -2.2% from a peak in June, which should weigh on profitability in the regions going forward, she said.

The tree change and sea change markets continue to see increases in profitability with only 1.9% of resales in coastal and non-coastal living areas registering a nominal loss in the June quarter, compared to 2 .3% in the three months to March 2022.

Ms Owen said this marked an all-time high for the resale rate with a nominal loss for the combined tree change and sea change markets.

“There were slight increases in the rate of loss sales in Geelong, the Gold Coast, Richmond Tweed and the Sunshine Coast, but these increases were marginal,” she said.

“Nevertheless, it is not surprising to see these markets seeing a slight change in profitability, given that these same markets are driving a sharp drop in value across regional Australia.”

Pain and Gain Perspectives

As the Australian housing market continued to suffer declines in value until the end of August, the rate of for-profit sales is expected to exceed a record high. In the coming quarters, more widespread declines in home values ​​could limit sellers’ profitability.

Ms Owen told Sydney that the notable rise in the rate of loss-making unit sales was likely due to an increase in investor shares being sold.

The sharp drop in home values ​​in Melbourne has impacted the number of for-profit sales, particularly in the inner city, where more than a third of resales have been sold for a nominal loss.

“Rising rates may trigger more sell decisions among investors, contributing to increased sales of loss-making units across the city,” she said.

“As rates continue to rise, it is likely that the for-profit sales rate will continue to decline in the coming quarters.”

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Eliza has extensive experience in real estate data analysis and reporting. She worked as an economist at Residex, a research analyst at Domain Group and previously as a commercial real estate and construction analyst at CoreLogic.

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