Huge profit in house resales

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New Zealand house owners are selling their properties for a gross 99% profit – the highest on record.

Monday, August 30th 2021, 11:28AM 2 Comments

CoreLogic’s quarterly Pain and Gain Report shows the record profits in the three months to June are up from the previous high of 98.9% recorded in the first quarter of the year.

Nationally the median resale gain was $347,500 – a new record high. In contrast the median resale loss was just $20,000 for the same period.

Across the main centres, Wellington was the strongest performer, recording a new record high and a median resale profit of $535,000.

The median gain in Auckland was $490,000 and $437,500 in Tauranga.

In Hamilton and Dunedin the median resale gain was $360,000 or more, while Christchurch median resale gain was $220,000.

CoreLogic’s chief property economist Kelvin Davidson says the extraordinary gains are a stark contrast to the housing market crash predictions made mid-last year at the height of Covid’s first wave.

“In the 25-year history of the data series, there’s never been as many resellers, in proportional terms, making gross profits from real estate sales.

“The strength and resilience of the market reflects the support measures for the wider economy that were put in place by the Government alongside low mortgage rates, which have pushed property values sharply higher,” Davidson says.

“The June quarter results are on top of previous gains, which means anyone who’s held their property for the traditional seven to 10-year period will inevitably sell for substantially more than they paid.”

Davidson says these profits would have been accumulated over many years and not just during the first post-Covid lockdown phase.

He also noted the majority of owners would typically need to recycle the equity to afford their next purchase, which is likely to have also increased sharply in value.

“The current level of ‘pain’ in the market is more like being tickled with a feather than a serious cut.

“This may remain the case for a few quarters yet. Anybody who’s owned a property for a number of years should still make a significant profit, even if the low-probability scenario of falling house prices came to fruition.”

The headwinds for the property market have been building this year.

They include the introduction of 40% deposits for investors, the phased removal of interest deductibility, a lower speed limit for high loan-to-value ratio (LVR) owner-occupier lending and higher mortgage rates.

Median hold period

Across New Zealand properties resold for a gross profit in the three months to June 2021 had been owned for a median of 7.4 years.

While the ownership period remained unchanged from the previous two quarters, hold periods for resale gains have reduced since the peak median hold period of 8.5 years was recorded in the fourth quarter of 2015.

For loss-making resales in the three months to June, the median hold period was 3.9 years, up from 3.5 years in the first quarter of this year.

The hold period for resale losses has been generally rising for a few years, reaching a low of 2.6 years in the fourth quarter of 2018.

Property types

Davidson says it’s become uncommon in recent years for houses to make a gross loss at resale, with 0.8% resold for less than the original purchase price in the three months to June.

“For context, in mid-2001 only 70 to 75% of house resales made a gross profit, and in early 2011 the figure was 80 to 85%.”

The share of apartments resold for a gross profit in the June quarter this year was 92.9% compared to the same period last year when only about 54% of apartment resales achieved a gross profit.

Outlook

The outlook for strong resale values remains robust when compared to previous prolonged periods where gains were recorded.

Resales stayed high at a rate of 97% or more between 2004 and 2007, and a repeat performance can’t be ruled out this time.

However, Davidson says the strong profits for resellers predated some of the new macro prudential measures introduced – and the August lockdowns.

While the economy and property market have proved capable of bouncing back quickly when restrictions lift, there’s uncertainty around the potential knock-on effect an extended lockdown could have.

“Regulatory pressures have quickly increased in the past six months, including the looming tightening of the speed limit for owner-occupier lending, which we suspect will hit first home buyers quite hard,” Davidson says.

“On top of that, mortgage interest rates have already risen and there is plenty more scope for further increases over the next 12-18 months.

“That could be problematic for stretched recent buyers, or even existing owners who have traded up with potentially larger mortgages than before.

“Overall it wouldn’t be a surprise to see the Pain and Gain figures soften a little over the coming quarters, but stay relatively strong going on past standards.”

Tags: CoreLogic housing market property investment

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