The profitability of Australian homes declined further in the first three months of the year as a greater share of resales occurred within a mere two years of ownership, despite the rising incidence of losses.
CoreLogic’s latest Pain & Gain Report shows the portion of dwellings that made a nominal gain from resale declined for the third consecutive quarter to 92.3% from a recent high of 94.2% in the three months to May 2022.
However, CoreLogic Head of Research and report author Eliza Owen said the gains from residential resales in Australia remain substantial overall and the rate of loss-making sales were relatively contained at a national level.
She said the decline in profit-making sales had broadly coincided with the national housing market downturn, which likely moved through a trough in February 2023.
The March quarter report analysed approximately 76,000 resales, with the number of loss-making sales increasing 4.6% over the period. The number of resales declined -6.5% compared to the December quarter.
Ms Owen said in the past few months, the level of profitability has deteriorated at a faster pace than in the previous quarter, despite the rate of decline in home values easing.
“As you would expect, changes in the portion of profit-making sales tends to move together with the capital growth trend. So, it’s unusual to see a sharper deterioration in profits through the March quarter, when prices were starting to stabilise. This could be linked to more short-term selling,” she said.
Looking at hold periods, an increasing number of March quarter resales had been owned for less than two years. Those that sold for a nominal gain increased to 8.4% from 6.6% in Q1 2022, while the portion of loss-making resales with a hold period of less than two years jumped from 3.4% in March 2022 to 12.4% for the same quarter this year.
“Such short selling times that involve sellers incurring a loss may be considered unusual, because hold periods typically increase during housing value downturns, as sellers try to avoid making a loss,” Ms Owen said.
“The implication may be that some sellers are choosing to incur a loss from resale in order to avoid particularly high mortgage repayments in the current rate-hiking environment.”
Despite a drop in the rate of profit-making sales, results were mixed across the capitals, with buyers cashing in on gains in smaller capital cities. Of the capital city markets, the rate of profit-making sales was highest in Hobart, where 99.0% of resales made a nominal gain. This was followed by a rate of 98.1% across Canberra and Adelaide.
The Brisbane housing market saw a slight increase in the rate of profit-making sales, to 95.7% in the quarter.
At the other end of the spectrum, Darwin, Perth, Sydney and Melbourne saw increases in the rate of loss-making sales to relatively high levels. In Sydney, the incidence of loss-making sales reached 10.7% in the March quarter, its highest level since the three months to August 2009.
For houses the rate of loss-making sales nationally increased slightly to 3.8% in the quarter, but the share of loss-making unit resales jumped to 15.4% from 13.8% in Q4 2022.
Ms Owen said the past year has seen a more rapid deterioration in profitability across the unit sector relative to houses, and this contributed to a record gap in the share of profit-making sales across houses and units as of March 2023.
“Given there is generally a higher concentration of investment ownership in the unit sector, the increase in servicing investment mortgages may be a factor contributing to the greater concentration of loss in unit resales,” she said.
Ms Owen said there was uncertainty around the outlook for profitability in residential real estate despite the portion of sellers making a nominal gain remained high, and home values nationally increased in the three months to May.
“There may be some motivated selling reflected in the next few quarters where property owners willingly sell at a loss to avoid rising mortgage interest rates,” she said.
“The combined factors of a recent sharp downturn in home values, and rising mortgage rates, may be inducing a higher incidence of loss across some parts of the country. Resource based markets, and large investment markets across Sydney and Melbourne, seem to be the main locations of this increased portion of loss-making sales.”
Key findings for Pain & Gain, March Quarter 2023
- CoreLogic analysed approximately 76,000 dwelling resales
- The incidence of profit-making sales nationally declined to 92.3%, down from a recent high of 94.2% in the three months to May 2022
- This marks the third consecutive quarter that profitability has declined
- The rate of profit-making sales was highest in Hobart at 99%
- Darwin had the highest rate of loss-making sales at 29.5% followed by Perth with 13.8%
- The proportion of houses resold for a loss increased to 3.8% while the rate of loss-making unit resales increased to 15.4%
- The median hold period for resales across Australia was 8.9 years in the March quarter, down from 9.9 years in the three months to December
- The total nominal profit from resales in the March quarter is estimated to be $22.7 billion, down from $25.9 billion in the previous quarter, and down from a record high of almost $40 billion in the December quarter of 2021
- The median nominal gain for resales was $276,500 nationally