With our property markets booming this year, the incidence of loss-making sales across both houses and units declined in the March 2021 quarter, but the rate of loss-making sales remains substantially elevated in the unit segment.
New research from CoreLogic found between January and March 2021, 90.3 per cent of all sales made a profit.
In the three months to March, 16.8% of units sold for a loss across Australia; almost two-and-a-half times the rate of loss-making sales for houses sold (6.8%).
Unit sales accounted for 26.7% of sales in the March quarter, but just over half of the loss-making sales.
The relatively low rate of loss-making house sales has been supported by far stronger growth rates in this segment of the housing market.
While both house and unit values are in an upswing, quarterly growth in house values through March 2021 was 6.5%, compared with 3.4% across units.
While the rate of loss-making house sales was below the decade average of 9.3%, the rate of loss-making unit sales was still elevated above an average of 15.5% for the past 10 years.
The incidence of loss among unit sales became particularly elevated from early 2018, following changes to macro-prudential regulation that likely altered demand conditions in the investor segment of the market.
Investor finance for the purchase of housing declined -23.9% between the 2017 and 2018 calendar years.
A lack of investor demand, which is often more skewed toward units, was amplified by an uplift in unit completions.
New unit supply peaked in the March 2017 quarter at around 28,000 but has remained elevated for the past 5 years.
More recently, unit construction has moderated against subdued investor demand.
How is profitability tracking across Inner Melbourne units?
As with the uplift in unit supply, unit values and profitability vary significantly by region.
When considering LGA regions of Australia that had at least 10 loss-making sales in the quarter, the concentration of loss-making unit resales ranged from 73.1% across Wanneroo in Perth, to 1.9% across Greater Geelong in Regional Victoria.
Regions that saw the portion of loss-making unit sales sitting above 50% were largely concentrated in resource-based markets or markets that have been subject to longer and larger property price downturns.
Examples of these areas include unit markets across Broome (70.6%), Gladstone (66.7%), and Townsville (52.8%).
Since the onset of the pandemic, housing demand conditions have changed dramatically for markets that were historically reliant on overseas migration for new housing demand.
Of particular concern at the onset of the pandemic was the ‘Melbourne – Inner’ dwelling market, which comprised mostly unit construction, and was exposed to the highest levels of overseas migration in the country prior to the pandemic.
A concern for inner-city Melbourne unit markets was that a fall in rent values would trigger many simultaneous investor sales in the region, reducing sales values and creating risk for highly leveraged investors.
Initially, this event was likely mitigated by institutional responses to the pandemic (namely mortgage repayment deferrals, which would have allowed property investors to temporarily forgo rental income).
Across the Melbourne LGA market, unit rent values have fallen -22.3% since February 2020, which marks a period before the onset of stage 2 restrictions and international border closures.
Unit purchase prices remained steady, increasing 0.6% in the same period.
Loss-making sales proportions and volumes provide further insight into risks associated with this market.
A time series of the portion and volume of loss-making unit sales are shown in the chart below.
The chart shows that through the March 2021 quarter, the number of loss-making sales did reach record highs at 173.
Underlying sales data indicates 86.0% of these loss-making sales were held by investors.
Declines in rent incomes through COVID-19 may have triggered more investor sales as social distancing restrictions eased, and transactions could more easily resume.
These sales were made in the context of rising transaction volumes overall (with an uplift of 21% in resales compared to a 41% rise in loss-making sales), and the portion of loss-making unit sales in this market was 37.6%, which is below the peak of 40.9% in the three months to January 2019 (which was near the trough of the last major downturn).
The median hold period for loss-making unit sales by investors in this region was 7.3 years, which is actually higher than the median hold period for loss-making unit sales at the national level.
The implication of longer hold periods on loss-making sales is that more housing debt may have been paid than from shorter hold periods, which may mitigate broader risks to financial stability in the housing segment.
As with houses, unit value increases are expected to continue through the rest of 2021.
In some regions, particularly higher-end markets which have already shown a high incidence of profit-making sales, demand may pivot further toward units due to affordability constraints across houses.
However, a lack of international migration does appear to weigh continually on rental markets across inner Melbourne and may prompt more investor sales in the coming quarters.
While unit values have broadly continued to increase across this market amid low-interest rates, the rate of growth across Melbourne LGA units has been weak, and a substantial improvement in the rate of profitability for this market seems unlikely in the near term.
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