New Zealand has reached a major turning point in the housing market, with a drop in the number of houses sold that made a gross profit.
CoreLogic NZ's latest Pain and Gain report said quarter two figures for this year revealed that the post-COVID-19 run has lost steam.
In the three months to June 2022, 98.1 percent of property resales made a gross profit - where the sale price was above the original purchase price - or gain, down from 99.1 percent in quarter one and 99.3 percent in quarter four 2021.
CoreLogic NZ chief property economist Kelvin Davidson said the results are not too much of a surprise following interest rate increases and a surge in new listings. This has shifted the balance of power from sellers to buyers and seen property values themselves decline.
In dollar terms, the median resale profit also dropped to $370,000 from $418,000 in quarter one 2022 and the record high of $440,000 in quarter four 2021.
Davidson said while resale figures had weakened, they remained relatively high with most property resellers still making a significant gross profit.
"We must put these figures into context and that is they're still historically strong, which reflects the fact that homeowners tend to hold property for seven or eight years on average, which locks in gains even as property values weaken over the short-term," he said.
"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."
The softer performance of property resales in quarter two 2022 is evident across most parts of the country, CoreLogic said, as well as property type - house or apartment - or owner type - owner-occupiers or investors.
In New Zealand, properties resold for a gross profit in quarter two had been owned for a median of 7.6 years, CoreLogic said. The median hold time of between seven and eight years has held steady since mid-2018, having trended downwards from almost nine years since late 2015.
Loss-making resales in the quarter were held for a median period of just 1.3 years, down from 2.1 years in quarter one and also lower than the most recent cyclical peak of 3.6 years in quarter four 2020.
"Given the relatively short hold period for these loss-making resales in the second quarter of 2022, it won't have helped that the market has now started to fall over the past six months or so," Davidson said.
"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."
Property resales in the main centres
Extra weakness is the emerging trend among the main centres, most notably Auckland, Wellington, and Hamilton, with slightly steadier conditions elsewhere, CoreLogic said.
Auckland saw 3.6 percent of property resales record a gross loss, up from 1.8 percent in quarter one 2022, and the highest figure since quarter three 2020 at 4.5 percent.
Hamilton also saw a relatively sharp rise in the number of resales that had a gross loss in quarter two, from 0.2 percent in quarter one to 2.6 percent, the highest since quarter two 2020.
Wellington's loss-making resales rose from 1 percent in quarter one 2022 to 2.2 percent in quarter two, the weakest since quarter four 2016 at 2.3 percent.
Davidson said Wellington's turning point is 'quite stark', given the city's extended period of very low loss-making proportions following the strong and extended period of growth in its property values.
Tauranga has gone from having 100 percent of profit-making resales in quarter one to 1.1 percent of resales incurring a gross loss in quarter two for 2022. Dunedin's volume of homes sold at a loss increased from 0.2 percent in quarter one to 1 percent in quarter two, while Christchurch edged up slightly from 0.7 percent to 0.9 percent.
"Again, these are low figures, but they signal a turning point for previously very strong markets," Davidson said.
"Most resellers 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, around $400,000 in Hamilton, and just over $300,000 in both Christchurch and Dunedin. But again, these are not as high as they've been in previous quarters."
CoreLogic's Pain and Gain report outlook
Although some investors may have been reassessing their sums a little more lately, as capital gains fade and mortgage rates rise, Davidson said the latest quarterly pain and gain figures reaffirm other evidence that there have been no "fire sales" or a rush for the exits.
He said one area of concern will be first-home buyers who purchased during the final quarter of 2021, when prices were at their peak. Assuming a 20 percent deposit was used and no principal has been paid back, 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, Davidson added.
"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 said.
"However, 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. It's just these profits may be a bit less common and smaller than we've grown used to."
