The latest CoreLogic Pain & Gain Report released today takes a deep dive into the profits and losses across property resales for the December 2019 quarter. Conducted by Economist Kelvin Davidson, the Pain & Gain results delivers a proxy for the performance of the housing market by highlighting the magnitude of profit or loss a typical seller of a home makes across the country.

In the key findings from this report (resales - 1 October 2019 to 31 December 2019), Kelvin Davidson found that:

  • A renewed strength in property values across the country at the end of last year has helped to keep the ‘gain’ figures strong. About 96% of property resales in the fourth quarter of 2019 were made above the original purchase price – an improvement from 95% in Q3.
  • Auckland and Christchurch both contributed to the overall improvement. Auckland’s share of profit-making resales rose to about 93% in Q4, up from 91% three months earlier. Christchurch improved from 89% to 90%. Meanwhile, Dunedin and Wellington remain buoyant, with profits seen on 99% of resales in Q4.
  • Not only is it common for property resellers to get a price above what they originally paid, the scale of those profits is significant.
  • Nationally, the median gain at resale in Q4 was $213,000 – up from $202,000 three months earlier. That swamped the median resale loss, which was just $25,000 in Q4.
  • By owner type, investors and owner-occupiers enjoyed improvements in Q4, with both groups making resale profits on more than 95% of transactions.
  • Owner-occupiers make a resale gain a little more often than investors, but the gap is small. In addition, in terms of the actual profits made, the median for investors (about $216,000) is above owner-occupiers ($212,000).
  • By property type, the largest shift in Q4 came from apartments (albeit this segment makes up a small proportion of transactions). For apartments, the share of resales made for a profit in Q4 was 89%, up from 84% three months earlier. For houses, more than 96% of resales in Q4 were made above the original purchase price.
  • The vast majority of areas around ‘provincial’ New Zealand continued to see solid rises in property values, and that is translating into high proportions of resales being made for a profit. The only areas that are a little behind are parts of the West Coast and Canterbury, and pockets of the North Island (e.g. Wairoa, Hauraki, and Far North).

 

According to Kelvin Davidson, “It’s important to remember that a relatively small number of resellers receive a cash windfall (e.g. downsizers, landlords selling off). For the rest, the equity gains are typically put straight back into the next property purchase.”

Across New Zealand as a whole, the proportion of properties being resold for more than the original purchase price (i.e. a gross profit, or “gain”) in Q4 2019 was 95.9%. That was up from 95.2% in Q3 2019 and was the highest since Q1 2019 (96.4%). The run of quarters where the gross profit percentage has been at least 95% has now extended to 14.

Kelvin Davidson said, “Such a long period of strength has only been seen on one other occasion in the past 20-25 years, from 2004 to 2007. That episode and the latest run of strength (since mid-2016) have both reflected the fact that property values rose strongly, almost guaranteeing a gross profit for anybody who owned for the typical 5-7 years.

“Of course, the flipside is that 4.1% of property resales in Q4 2019 were made below the original purchase price, i.e. the sellers experienced a gross loss, or “pain”. Of these loss-making resales, less than one in every ten had previously had a consented renovation (although they may of course have had non-consented maintenance). So in other words, many of the loss-makers in the final three months of 2019 could well have been in poorer condition, making a reduced sale price more likely.”

In addition to most resales making a gross profit, the actual gains made are running at high levels too. Indeed, the median resale profit in Q4 2019 was $213,000 – a new record high, surpassing the previous mark of about $205,000 in Q2 2019. At the peak of the previous upswing, in mid-2007, the median resale profit was a lot lower, at $129,500.

Multiplied out across the number of resales in Q4, total profits were $3.7bn. That’s an impressive figure, but reflecting the lower level of activity that we’ve seen in recent years, the total profit in Q4 was well below the peak of $5.2bn in mid-2016. It’s worth noting that sales activity has been held down lately by a lack of available listings, not necessarily a subdued level of demand.

Turning to the other side of the coin, the median gross loss at resale in Q4 2019 was a relatively small $25,000 – unchanged from the Q3 2019 figure. Total losses came in at $34.3m in Q4 2019, very small when compared to the total gross profits.

Overall, Kelvin Davidson said, “The latest Pain & Gain figures show a continuation of recent trends.

“With property values still rising, most resellers can lock in a price well above what they originally paid, especially if the property has had a renovation. In most cases, this equity will be put back into the next property purchase, although in some cases (e.g. for a downsizer, an owner-occupier going renting, or a landlord exiting the sector) this is a cash surplus.”

Report Snapshot Below

Median Hold Period
Across New Zealand as a whole, properties resold for a gross profit in the three months to December 2019 had been owned for a median of 7.6 years – the same as in Q3 2019 and generally in line with the results of the past two years. Back in 2014-15, hold periods for profit-making resales were a little longer, at around 8.5 years.

Property Types
Kelvin Davidson said, “It remains uncommon for houses to make a gross loss at resale.

“The share of house resales at less than the original purchase price in the three months to December 2019 was only 3.8%, down from 4.4% in the previous three-month period. The latest figure was the lowest since Q1 2019 – or in other words, the share of house resales for a gross profit, i.e. 96.2%, was the highest for three quarters.”

The small rebound that was seen for apartments in Q3 2019 also rolled on into Q4, with 89% of resales being made for a gross profit. In Q2 last year, that figure was only 83%. The apartment trends can be a little volatile from quarter to quarter, but given the wider strength of the rebound in the housing market in recent months, it seems likely that apartments have now more emphatically turned the corner in terms of resale performance.

That said, Kelvin Davidson said, “There’s been a clear historical pattern for proportionately fewer apartment resales to be made for a gross profit than houses – so the gap is unlikely to close over the next few years either. We suspect that this gap reflects a greater tendency for apartments to be owned by financially-minded investors (rather than emotionally-driven owner occupiers), who are prepared to make the tough decisions and move on quickly, even if that means selling for less than what they paid.

“Of course, although it’s more common for apartments to make a resale loss than houses, the actual losses themselves aren’t any bigger. In fact, they were smaller in Q4 2019 – a median loss for apartments of $21,000, versus $24,000 for houses.”

Median resale profits for apartments were also pretty impressive in Q4, coming in at $160,500 (close to a record high). For houses, the median profit was also an impressive $210,500, the highest figure for at least 25 years.

Main Town Centres
The national picture of improving ‘gain’ and reducing ‘pain’ in the final quarter of 2019 was reflective of more positive trends in each of the main centres.

Hamilton remained stable with around 98.5% of resales in Q4 made for a gross profit, while Tauranga improved from about 97% in Q3 to 97.5% in Q4. Wellington also edged up, to more than 99%, while Auckland and Christchurch were key improvers.

Auckland’s figure rose from about 91% of resales for a gross profit in Q3 2019 to 93% in Q4. This reflects the solid rebound in average property values that was seen across the super-city towards the end of last year, in turn reflecting rising demand and a declining supply of available listings on the market.

Christchurch - the share of resales made for a gross profit also improved in the fourth quarter, from 89% in Q3 to 90% in Q4. This is still lower than past norms, but anecdotal evidence points to a wider market rebound across the city, and certainly our house price index is showing stronger trends in property values. It wouldn’t be a surprise to see the profit figures for Christchurch improve next quarter too.

In Dunedin, the share of resales made for a gross profit edged up from zero in Q3 to a touch less than 1% in Q4. That’s nothing to worry about, because the figure is still very low and reflects a minimal number of just five properties sold below the original purchase price.

Similar to the national picture, Kelvin Davidson said, “Regardless of how often ‘pain’ was seen around the main centres in Q4, the actual scale of any losses was relatively small, e.g. in Hamilton there was a median resale loss of only $5,000.”

In every case, the median resale profits were much greater than losses. Auckland still leads the pack, with a median resale profit in Q4 of $345,000, ahead of Wellington at $312,000. Notably, Dunedin’s median resale profit (almost $225,000) was substantially larger than Christchurch’s ($130,000). This reflects the surge in the market in Dunedin over the past three to four years, which has taken the average property value above Christchurch for the first time – even though Dunedin’s physical stock tends to be older.

Type of Owner
Profit-making resales remained high for both investors and owner-occupiers in the fourth quarter of 2019, and the figures actually improved for both owner types too. Owner-occupiers remain slightly more likely to resell above the original purchase price than investors, but the gap is pretty small.

For owner-occupiers, 96.3% of resales in Q4 2019 were made above the original purchase price, an improvement from 95.4% in Q3. And for investors, Q4 marked the second quarter of (mild) improvement in a row, from 95.3% in Q3 to 95.5% in Q4. Regardless of owner type, the frequency of resale profits is high in an historical context – e.g. back in 2011, only around 80% of resales were made above the original purchase price.

Meanwhile, as is typically the case (whether you look through time, or property type, or location), a renovation is associated with a greater likelihood of achieving a gross profit at resale, whether the owner is an investor or occupies the property.

Throughout a fair proportion of last year (especially in the first 5-6 months), there was a lot of speculation that investors would be heading for the exits and selling their properties en masse, due to extra costs (e.g. insulation), potentially higher taxes (e.g. capital gains), and changes to other landlord rules (e.g. removal of ‘no cause’ lease terminations).

With capital gains tax has been shelved, and alongside other factors (e.g. low returns on alternative assets, such as term deposits), Kelvin Davidson said this has contributed to renewed buying activity by investors. He said, “The worst fears about a sharp reduction in the number of available rental properties can be put to rest, and indeed, the latest Pain & Gain figures show that when an investor does actually make a sale, they’re doing so for a good price and not just accepting a ‘fire sale’.

“Generally an investor is more likely to sell for a resale loss than an owner-occupier, but the differences aren’t huge – e.g. in Hamilton and Dunedin, about 99% of resales in Q4 were made for a gross profit, for both investors and owner-occupiers. The gaps are the biggest in the markets where (until recently) the performance of property values has been weaker, namely Auckland and Christchurch.”

Proportion of total resales at a loss
In terms of the actual profits/losses themselves, investors made a median loss of $28,000 in Q4, a little worse than $23,000 for owner-occupiers. On the flipside, the median profit for investors was almost $216,000, about $4,000 more than for owner-occupiers.

Main Urban Areas
Upper North Island
The main centres in the top of the North Island continued to see strong gains to finish 2019. Rotorua and Whangarei remained solid, with more than 98% of resales made for a gross profit in Q4. In Gisborne, the figure was more than 99%, with only one property sale in Q4 2019 not making more than the original purchase price (in fact, it was sold for the same price as originally paid).

In dollar terms, the gains were also strong. Gisborne’s median resale profit in Q4 was $170,500, with this solid figure reflecting continued strength in property value growth across the city and region. In Whangarei and Rotorua, those median resale profits topped the $200,000 mark in Q4.

Aggregated across all sales, total profits in these markets ranged from around $30m in Gisborne up to almost $77m in Whangarei.

Lower North Island
In each of the key centres around the lower North Island, the share of property resales made above the original purchase price was at least 98% in the final three months of last year. In other words, these markets continue to deliver solid gains for property resellers, consistent with the ongoing growth in property values.

New Plymouth and Whanganui had slightly lower figures (around 98.5%) in Q4 than the rest, but those are still impressive results. In Palmerston North, Napier, and Hastings, the figures were 99% or above.

Consistent with the high frequency of resale profits, the gains themselves were strong too. Median gains in Q4 for resales in New Plymouth and Whanganui were each around the $150,000 mark, while Palmerston North topped $200,000. In Hastings and Napier, the figures were in excess of $240,000.