House profits dropping and some owners in negative equity

More houses sold at a loss for the second quarter in a row, CoreLogic’s latest Pain & Gain report shows.

Thursday, August 18th 2022, 8:30AM

by Sally Lindsay

The housing data company says residential real estate has reached a turning point and the softening in values could have plunged more than 500 first home buyers into negative equity, with mortgages larger than what their homes are now worth, assuming they had a 20% deposit and had not paid back any capital.

The report shows across the country the average profit on properties being resold is dropping. The median resale profit for a house was $366,000 and for apartments $196,750.

In terms of losses, houses had a median of $25,000 and apartments $74,000.

CoreLogic senior property economist Kelvin Davidson says, however, most home owners are still getting a price well above what they originally paid – ranging from a gross profit of more than $500,000 in Auckland and Tauranga, more than $450,000 in Wellington, about $400,000 in Hamilton, and just over $300,000 in both

Christchurch and Dunedin. “These are not as high as they’ve been in previous quarters.”

In the three months to June 2022, 98.1% of property resales made a gross profit or gain, down from 99.1% in the first quarter and 99.3% in the fourth quarter of last year.

Across the country properties resold for a gross profit in the second quarter had been owned for a median of 7.6 years. Loss-making resales were held for a median period of just 1.3 years, down from 2.1 years in the first quarter and also lower than the most recent cyclical peak of 3.6 years in the fourth quarter of 2020.

Auckland had 3.6% of property resales record a gross loss, up from 1.8% in the first quarter, and the highest figure since of the third quarter in 2020 when the figures hit 4.5%.

Hamilton also had a relatively sharp rise in the share of resales made for a gross loss, from 0.2% in the first quarter to 2.6% – the highest since the second quarter of 2020.

Wellington’s loss-making resales rose from 1% in the first quarter to 2.2%, the weakest since the fourth quarter of 2016 when they stood at 2.3%.

CoreLogic chief property economist Kelvin Davidson described Wellington’s turning point as “quite stark”, given the city’s extended period of low loss-making proportions following the strong and extended period of growth in its property values.

Tauranga has gone from having 100% of profit making resales in the first quarter to 1.1% of resales incurring a gross loss in the second quarter.

Dunedin’s volume of homes sold at a loss increased from 0.2% in the first quarter to 1% in the second quarter, while Christchurch edged up slightly from 0.7% to 0.9%.

Davidson says given the relatively short hold period for these loss-making resales in the second quarter, it won’t have helped that the market has now started to fall over the past six months or so.

“Equally, however, given continued low unemployment, it’s unlikely that many of these were ‘stressed’ sales and are probably associated with an unexpected change in personal circumstances.”

He says the overall results are not too much of a surprise following interest rate increases and a surge in new listings, which has shifted the balance of power from sellers to buyers – and seen property values themselves decline.

He acknowledged while resale figures had weakened, they remained relatively high with most property resellers still making a significant gross profit.

“Put into context, these figures are still historically strong, which reflects the fact home owners tend to hold property for seven or eight years on average, which locks in gains even as property values weaken over the short-term.

“Nevertheless, the turning point has arrived and for owner occupiers this isn’t typically a cash windfall unless they’re downsizing or moving into a cheaper location. Often sellers need the entire amount, and then some, to upgrade into their next property.”

Property Types

Profit-making resales for houses fell below 99% for the first time in 18 months, with 98.5% of houses resold for a gross profit.

Apartment gross profit resales have fallen for three consecutive quarters from 94.6% in the third quarter last year to 87.4% in the second quarter this year, meaning 12.6% of apartments resold during the period for less than their purchase price.

Davidson says the breakdown of data by property type reaffirms the recent change in market conditions, with gross resale profits a bit less common and losses coming a little more frequently, especially for apartments, which tend to have fewer profit-making resales compared to houses and show extra volatility as well.

Owner type

The share of investor property resales made for a gross profit in Q2 also dropped, from 99.1% in the first quarter to 97.6%. That was the softest figure in nearly two years when it was 97%.

For owner occupiers, 99.4% of resales in the first quarter of the year achieved a gross profit – but this figure dropped slightly to 98.6% in the three months to June. It is the softest figure since the third quarter 2020, when it was 97.3%.

Pain & Gain Outlook

Although some investors may have been reassessing their sums a little more lately – as capital gains fade and mortgage rates rise –Davidson says the latest quarterly pain and gain figures reaffirm other evidence that there has been no “fire sales” or a rush for the exits.

“It seems likely that property values have further to fall over the coming months, so additional weakening of the resale performance data is on the cards for the next two quarters and into 2023.”

He says with unemployment still low and long-term growth expected to return at some stage, genuine “forced sales” remain few and far between with borrowers willing and able to ride out the downturn.

For this reason, it’s likely most resellers will continue to see gross profits in the coming quarters, especially if they’ve owned the property for an extended period of time, says Davidson.

“It’s just these profits may be a bit less common and smaller than we’ve grown used to.”

Tags: house prices