The resale performance of residential real estate has started to weaken, CoreLogic NZ’s latest Pain & Gain report found. In Q1 2022, 99.1% of properties resold made a gross profit, or gain, on the previous purchase price, down marginally from 99.3% in Q4 2021.
The resale performance of residential real estate has started to weaken, CoreLogic NZ’s latest Pain & Gain report found.
CoreLogic NZ Chief Property Economist Kelvin Davidson says it’s nothing dramatic yet, but is likely to become clearer over the coming quarters.
In the three months to March 2022 (Q1 2022), 99.1% of properties resold made a gross profit, or gain, on the previous purchase price, down marginally from 99.3% in Q4 2021.
In dollar terms, the median resale profit also dipped slightly to $406,000, down from a record high of $435,000 in Q4 2021, but still the second highest profit in the 26-year history of this data series. Just two years ago, pre-pandemic in Q1 2020, the median resale gain was $233,632.
Mr Davidson says “While the figures have softened consistent with the wider market slowdown, the fall is only minor and it may be some time before we see more substantial declines in profit-making resales. There’s no doubt that these figures are still strong, both in the frequency and size of the gains.
“We shouldn’t necessarily expect the turning point for the wider market to flow through significantly and immediately to these figures, due to the fact that hold periods play a key role. Somebody who’s owned their property for 7-10 years before selling will inevitably make a gross profit, even if market values have fallen a bit from their recent cyclical peak.
“With the exception of a dip in Q2 2020 which was probably distorted by our first big lockdown, you have to go back to Q2 & Q3 2019 to find a dip in the quarterly gain figures. For a more material and sustained drop in the percentage of resales making a gross profit you have to go back to 2010-11.”
Across the main centres, Auckland and Wellington saw the biggest falls in the portion of properties resold for a gross profit, while Christchurch (99.5%) and Dunedin (99.7%) had no change quarter on quarter. In Hamilton and Tauranga proft-making resales actually increased with all deals making a gross profit for the seller.
However, Mr Davidson says it’s important to remember that for many owner-occupiers, the gains are not a cash windfall, as they will typically just be ploughed back into their next property – potentially alongside a larger mortgage too.
“Unless they’re downsizing or moving to a cheaper location, these resale gains are not typically cash windfalls and in most cases, any profit made from a resale will need to be injected straight back into a new property, with ‘trade ups’ actually likely to involve higher debt levels in many cases, too.”
Median Hold Period
Across New Zealand, properties resold for a gross profit in Q1 2022 had been owned for a median of 7.5 years, slightly up on Q4’s 7.2 years and consistent with the typical range of 7-7.5 years recorded over the past two years. For loss-making resales, the median hold period was 1.8 years, down from 2.5 years in the previous quarter.
Mr Davidson says “This is the shortest median hold period for loss-making resales since Q3 2008. Given that short hold periods tend to be associated with an unexpected change in circumstances, this highlights how in the recent strong market, it’s only been that handful of ‘stressed’ sales that have had to take a loss.
However, Mr Davidson says it wouldn’t be a surprise if loss-making resales become more common over the coming quarters, and due to broader circumstances.
“As interest rates rise more property owners may be forced into a short-hold, loss-making resale. Certainly, there are likely to be some investors who have purchased in the last couple of years who may now be questioning their decision, as gross rental yields remain low, regulatory and mortgage costs rise, and capital gains evaporate (or even turn into paper losses). Some of these owners may be looking to consolidate/reduce debt levels, and potentially be willing to cut their sale price in order to do that.
Out of the main centres, Christchurch had both the longest hold period for resale gains (9 years) and shortest hold period for resale losses (0.6 years).
Profit-making resales for houses have remained above 99% since Q1 2021, and is now at 99.4%, just down on Q4’s record high of 99.5%. Comparatively a decade ago, 80-85% of house resales made a resale gain.
The share of apartments being resold for a gross profit fell more significantly, down more than three percentage points to 91.1%.
However, Mr Davidson says this isn’t too concerning.
“At various stages in the past, we’ve sometimes had about 50% of apartments resold for a gross loss (e.g. 2008), and even as recently as 2019, the share was up in the 15-20% range.
The share of property resales made for a gross profit remained high for both owner occupiers and investors in Q1 2022, however owner occupiers did see a larger fall this quarter.
Owner occupiers share of resales made above the original purchase price dipped from 99.5% in Q4 2021 to 99.2% in Q1 2022, while investors proportion of resales was unchanged quarter-on-quarter, at 99.2%.
Pain & Gain Outlook
Looking ahead, Mr Davidson says the Pain & Gain figures are likely to continue to soften slowly.
“Given that most people have built big ‘paper’ gains over many years of ownership, it’ll take time for falling prices to have much effect on capital gains built up over several years of ownership.”