The resale performance of residential real estate has continued to deteriorate, as the wider property downturn affects the ability of vendors to sell above their purchase price, CoreLogic NZ’s latest Pain & Gain report shows.
In the three months to September 2022 (Q3 2022), 96.8% of property resales made a gross profit, down from the peak of 99.3% in Q4 2021 and the lowest level since Q2 2020 (96.3%).
CoreLogic NZ Chief Property Economist Kelvin Davidson said despite the decline in profit-making resales over the last two quarters, context is important.
“Through 2000 and 2001, it was common for the profit share to be as low as 75%, and in the post-GFC period, that figure was often as low as 80%. Clearly, the latest figures are still well above those marks.”
In dollar terms, the median resale profit also remains high, but dropped to $331,000 from the peak of $440,000 in Q4 2021.
The softer performance of property resales in Q3 is evident across most parts of the country, as well as property type (house vs apartment) and owner type (owner occupier vs investor).
Median Hold Period
New Zealand’s median hold period for properties resold for a gross profit has held relatively stable in the range of seven to eight years since 2017, with this quarter no exception.
Properties resold for a gross profit in Q3 2022 had been owned for a median of 7.7 years, close to Q2’s figure of 7.6 years. For loss-making resales in Q3, the median hold period was just 1.3 years, also basically unchanged from Q2 2022’s figure, and on a par with a long trough seen over 2005-07.
“Anybody who has held for the typical seven to eight year period should still be sitting on large capital gains,” Mr Davidson said.
“Putting aside small quarterly shifts, the hold period for profit-making resales has held steady in a long run context, given that in mid-2001 the median hold period for profit was only about 6.5 years, and in 2005-06 it was as low as four years.”
Profit-making resales for houses fell below 97.5%, the lowest proportion since Q3 2020 but still well above the pre-COVID average. However profit-making resales for apartments are steadily declining, from a peak of around 94-95% in 2021 to be 82.4% in Q3, the lowest since Q1 2015.
The median resale profit for houses was $330,000, and apartments achieved $158,000. In terms of losses, houses saw a median of -$40,000 and apartments -$43,000 (although this figure only covers a relatively small number of apartment transactions).
“The bulk of those loss-making apartment resales were in Auckland, which is unsurprising given Auckland has the most apartment stock. Wellington also had a handful of loss-making apartment resales in Q3 2022,” Mr Davidson said.
“Again, however, context is important. Even though the share of apartment resales being made below the original purchase price has risen, it’s not time to panic. After all, at 17.6%, the figure is still reasonably low by past standards”.
The share of property resales made for a gross profit declined in Q3 for both owner occupiers and investors. Owner occupiers saw 97.0% of resales make a gross profit, down from 98.6% in the June quarter, while 97.1% of investors made for a gross profit in Q3, down from 97.6% in the previous quarter. However, the median resale gain was larger for investors at $337,750, versus $324,000 for owner occupiers.
“It’s important to note that for owner occupiers these aren’t necessarily windfall gains. After all, their next property will have gone up in value over time too, with their fresh equity just having to be recycled into that next purchase,” Mr Davidson said.
Auckland, Wellington, and Dunedin are showing a bit of extra weakness, versus slightly steadier, albeit softening, conditions in Hamilton, Tauranga and Christchurch.
Auckland’s share of profit-making resales reduced by 2.6 percentage points quarter-on-quarter to 94.2%, the lowest figure since Q4 2019. Dunedin’s share also reduced by 2.1 percentage points to 96.9%.
However most resellers are still getting a price well above what they originally paid – ranging from a gross profit of more than $400,000 in Tauranga, Auckland, and Wellington, down to about $368,000 in Hamilton, and $300,000 or less in Dunedin and Christchurch.
Pain & Gain Outlook
“As listings and interest rates have risen, mortgage credit has tightened, and property values themselves have dropped, the resale performance across the market has started to weaken more materially,” Mr Davidson said.
“While the impact of a downturn will never be immediate on resale performance, simply because of the critical role hold periods play, the impact is still there with gains becoming less common, and certainly the dollar value of those gains falling quite quickly.
“In past downswings, we have seen the profit-making share of resales dip as low as 75-80%. While it’s uncertain if we’ll get there again, historical data suggests that profit-making resales could fall as low as 90% over the coming quarters, potentially even lower, particularly as existing borrowers reprice from previous low rates onto a much higher repayment schedule potentially forcing faster sales,” he said.