What lessons can you learn from those who made a profit in property last year?
Or from those who sold at a loss last year?
While the world in property has changed turned on its head in the last few weeks, there are still lessons to be learned from the latest Corelogic Pain and Gain report which tracks who’s won and lost in property.
The latest report is for the December 2019 quarter, which was before anyone ever new about Coronavirus.
In this detailed article we look at where the pain and gains were experienced:
- Houses versus units
- Owner occupies vs investors
- Pain & Gain in Sydney
- Pain & Gain in Melbourne,
- Pain & Gain in Brisbane.
Nationally, a high portion of houses (90.1%) resold at a profit relative to units (81.9%).
This means that units are about twice as likely to sell at a loss relative to houses.
However, both houses and units had improved concentrations of profit making sales, with the portion of houses up 0.1 percentage points, and units up 1.7 percentage points.
Every capital city and rest of state region had a higher portion of loss-making sales among units than houses.
Of the capital city markets, the highest concentration of loss- making unit sales was in Darwin, where more than half of the units sold at a loss over the quarter (61.3%).
Darwin is an extreme case, where 32.7% of houses also sold at a loss.
A significant factor contributing to the higher rate of loss making unit sales is oversupply, which puts downward pressure on rent yields and prices.
During the national dwelling market upswing between 2012 and 2017, investor demand in Australian real estate was particularly strong, making up 39.5% of the new mortgage market.
Developers responded with high levels of unit supply.
This is acute in Brisbane, where the portion of unit loss making sales is 30.6 percentage points higher than houses (albeit the portion of loss making sales is declining).
Completion data from the Australian Bureau of Statistics suggests 21,342 units were completed across Queensland over 2016, against a historic average of 11,585 per year.
This over-hang of supply has been progressively absorbed, as residential construction has corrected.
Most capital city unit markets were seeing improved conditions over the December quarter.
It is hard to say whether the economic impact of COVID-19 will have a disproportionate effect on profits and losses in the unit segment.
Anecdotally, there are already challenges faced by investors, discussed in the next section, and ABS census data suggests a far higher portion of units are investment properties (64.4% at 2016).
Both house and unit stock should see a better trajectory when Australia’s economic operations return to normal.
Proportion of total resales at a loss/gain, houses vs. units, December 2019 quarter
|Rest of NSW||5.1%||94.9%||8.5%||91.5%|
|Rest of Vic.||2.8%||97.2%||4.9%||95.1%|
|Rest of Qld||14.1%||85.9%||24.2%||75.8%|
|Rest of SA||18.3%||81.7%||20.8%||79.2%|
|Rest of WA||38.4%||61.6%||55.6%||44.4%|
|Rest of Tas.||2.8%||97.2%||3.4%||96.6%|
|Rest of NT||29.3%||70.7%||36.8%||63.2%|
|Australian Capital Territory||2.4%||97.6%||18.6%||81.4%|
Investor vs Owner Occupier Resales
Investors continue to be more likely to resell their properties at a loss compared to owner occupiers.
In the December 2019 quarter, 9.8% of properties owned by owner occupiers resold at a loss, compared with 15.7% of investment properties.
Across each of the major regions, with the exception of Hobart and regional Victoria, a greater share of investors resold their properties at a loss than owner occupiers.
The largest divergence in loss making sales between owner occupiers and investors was in Darwin, where 37.1% of owner occupiers sold their properties at a loss, compared with 57.6% of investors.
The smallest gap was in regional Tasmania, where very few properties were sold at a loss across the board.
Both investors and owner occupiers nationally saw a decline in the portion of loss making sales.
The portion of loss making sales among owner occupiers declined 1.3 percentage points, while investor loss making sales declined 0.9 percentage points from the September 2019 quarter.
Investors may be more inclined to sell properties at a loss due to the taxation benefits. Investors may be able to claim losses against future capital gains.
This taxation parameter alleviates some of the risk around property investment, and helps to support investor decisions to ‘cut their losses’.
Investors may find occupancy rates are impacted over the coming months amid the COVID-19 slowdown, especially in rental areas with more exposure to heavily impacted sectors such as education, tourism and hospitality.
With the risk of rising unemployment in these sectors and progressively other sectors as new policies around social distancing or shutdowns are implemented, tenant demand may recede.
Travel bans may lead holiday rental owners to convert their properties to long-term tenancies, increasing supply.
However, the comprehensive institutional response from the RBA, APRA and government will likely cushion these scenarios.
Additions to job seeker assistance payments, the potential to unlock superannuation funds, and more flexible arrangements for mortgage holders may prevent rental properties being sold.
Essentially, institutions seek to maintain the current flow of employment, rental income and mortgage repayments to minimise structural changes to the economy until things return to their previous operating conditions.
Proportion of total resales at a loss/gain, owner occupied vs. investors, December 2019 quarter
|Region||Owner Occupied||Investor||Owner Occupied||Investor|
|Australian Capital Territory||4.6%||22.2%||95.4%||77.8%|
Nationally, profit making sales in the December quarter had a median hold period of 9.5 years, while loss making sales where typically held for 6.3 years.
This was slightly different for houses and units.
Loss making house sales had typical hold periods of 6.4 years, while profit making house sales were held for 53.1% longer (9.8 years).
Loss making unit sales were held for a relatively short time, of 6.1 years, and profit-making unit sales were 36.6% higher at 8.3 years.
The region with the shortest hold period for profit making sales was regional Tasmania, where profit making unit sales were held for 6.6 years, and returned a median profit of $94,250.
This is unsurprising given the high growth rates in parts of the state.
The Launceston & North East saw nominal unit value increases of 32.8% over the past 6.6 years
The following chart shows the typical yields of properties sold in the December 2019 quarter by hold period.
The data demonstrates that longer hold periods typically yield greater returns.
Like equities, property assets held for long periods of time have made significant gains despite historic economic shocks and market cycles.
For those who can afford to, it may be worthwhile trying to hold property through the current market conditions, and allow property values to recover from a pandemic-induced slowdown.
Median return from sale by hold period, houses and units combined – December 2019 quarter
Median hold period (in years) of resales at a loss or gain, houses vs. units, December 2019 quarter
|Australian Capital Territory||2.5||7.8||10.3||7.6|
Pain and Gain in Sydney
91.9% of Sydney dwellings resold for a gross profit over the December 2019 quarter, up from 90.3% in the previous quarter, but down slightly from 92.3% in the previous year.
Sydney dwelling values increased a further 6.2% in the December 2019 quarter, following the start of a sharp uplift in prices from June.
This contributed to the increased level of profit making sales. However, December quarter result is still below the decade average, where 94.7% properties sold at a gain.
The median gain of profit making sales across Sydney in the quarter was $360,000.
The median loss for loss making resales was $55,500.
Of the 1,144 sales in Sydney that made a loss, 54.8% were units.
The typical hold period of loss making sales was just 3.3 years, capturing one of the longest and largest property market downturns in decades.
When aggregating up to council regions, the highest portion of loss making sales was the Hunters Hill region (17.1%), albeit off a relatively low sales volume.
It is also noteworthy that while Hunters Hill had the highest portion of loss making sales, it also had the highest median profit, demonstrating strong growth in the area longer term.
As with last quarter, the highest portion of profit making sales was in Mosman, where 97.9% of properties made nominal gains at the point of resale.
This also reflects the recent gains concentrated in the high end of the Sydney market.
As may be expected when breaking down the loss making sales in Sydney, the unit market had a higher portion of loss making sales (at 10.8%) than houses (6.2%).
Pain and Gain Melbourne
94.2% of Melbourne properties resold for a profit in the December 2019 quarter.
This was the second-highest result for the concentration of profit making sales behind Hobart.
The portion of profit making sales is an increase on the previous quarter (which was 93.0%), and comes off the back of value gains across the Melbourne dwelling market of 6.1%.
The dynamic of loss making sales across Melbourne are different to the Sydney property market.
There were 904 loss making resales across Melbourne analysed in the December quarter.
Of these, the majority were owned by investors (61.8%), and the loss making sales were relatively concentrated across 142 suburbs.
The highest portion of loss making sales was in the City of Melbourne council region, where 33.0% of properties sold at a loss.
This reflects many of the same dynamics discussed in the previous quarters’ report, where the vast majority of these sales were investor-owned unit stock.
More pressure may be put on investor-grade unit markets in Melbourne over the coming months.
This is because short term and student accommodation will be in less demand amid travel bans, where Melbourne is otherwise a city that attracts high levels of international migration.
The highest level of profit making sales in the December quarter were concentrated in Cardinia and the Macedon Ranges, with each region seeing 98.7% of sales make a nominal gain.
Pain and Gain Brisbane
Over the December 2019 quarter, profit making resales across the Brisbane housing market had generally increased.
Profit making sales comprised 88.7% of resales, up from 88.1% in the previous quarter.
The higher portion of loss making sales relative to Sydney and Melbourne is largely due to subdued performance in the unit market, where 35.2% of units sold at a loss compared with just 4.7% of houses.
A similar dynamic is reflected across the local government areas of Brisbane.
In the Brisbane city council 13.6% of resales incurred a loss in the December quarter, 84.9% of which were units.
The Brisbane unit market is another area where travel restrictions and slowed business activity will likely disrupt the recovery trend of the Brisbane unit market, but low interest rates and high levels of affordability may see a sharp uplift in demand once the virus has been contained.
The Somerset council region had the highest portion of profitable sales over December, at 93.8%.
Profitability in the region is reflective of slow and steady growth, where the median profit was the lowest of council areas analysed, but hold periods relatively high.
Subscribe & don’t miss a single episode of Michael Yardney’s podcast
Hear Michael & a select panel of guest experts discuss property investment, success & money related topics. Subscribe now, whether you're on an Apple or Android handset.
Need help listening to Michael Yardney’s podcast from your phone or tablet?
We have created easy to follow instructions for you whether you're on iPhone / iPad or an Android device.
Prefer to subscribe via email?
Join Michael Yardney's inner circle of daily subscribers and get into the head of Australia's best property investment advisor and a wide team of leading property researchers and commentators.