House resale profits slump markedly

CoreLogic’s Pain and Gain report for the fourth quarter of last year shows 4% of property sold in the final three months went for a price less than originally paid.

Chief property economist Kelvin Davidson says the interesting part is most of those properties were bought and sold within just 19 months on average, which indicates interest rates are starting to bite.

“A change in an owner’s financial situation could be behind a short hold period – and at the moment, rising interest rates are a clear candidate for motivating some of these sales. At the same time, other factors such as divorce or death can also drive unexpectedly short hold periods,” he says.

Where the pain was felt

Apartment owners, who are mainly investors, felt the most pain. While it’s a much smaller property market segment than standalone homes, about a quarter of those who sold at the end of last year lost money on their sale. The median resale loss on apartments was $52,750.

Davidson says that’s the highest it’s been in a decade, which could create a risk.

“Apartments are clearly a property type worth keeping an eye on over the next six to 12 months, given a tendency for them to be owned by investors – who may be more financially minded, and willing to rejig their portfolios in a low yield/high interest rate environment.”

He says context is important though. The same figure was about 50% during the Global Financial Crisis.

Of all the main centres, the trend was most pronounced in Auckland, with 6.9% of those who resold properties at the end of last year, doing so at a loss.

Further south and Hamilton had the biggest change. More than 6% of properties resold there for less than their purchase price, almost double the previous quarter.

Scale of losses and gains

Despite the increase in loss-making sales, Davidson says most people are still making money when it comes time to sell, just not as much as they were previously.

About 96% of properties resold in the last three months of 2022 made a profit, down almost 1% on the third quarter.  Owner-occupiers pocketed a median profit of $313,000 and investors $343,500.

The combined median resale gain of $328,000 is down significantly from the peak of $441,000 in the fourth quarter of 2021, although still remains high. Davidson says there’s clear reason for this.

“Hold period plays a key role in the size of any resale profit, and owner-occupiers are not generally making cash windfalls. Their gains will typically be put back into their next purchase, unless they downsize or move somewhere cheaper.”

Pain and gain outlook

Davidson says these are still solid numbers for vendors, but for now the market continues to be in favour of buyers.

“The housing market still faces significant challenges, especially with unemployment set to rise this year and as new and existing borrowers face up to the possibility of mortgage rates up to 7%.”

With that in mind, he says we can expect to see more ‘pain’ and less ‘gain’ in the property market for the rest of the year.