The long-run impact of the Coronavirus economic impact on property values is unclear and will be subject to labour market conditions, credit policies and government stimulus measures as well as the length of time it takes for economic conditions to start improving.
Eliza Owen, who heads up the CoreLogic residential research team, is of the belief that this current economic downturn is likely to be temporary, with activity starting to resume once the virus is contained.
Whether it be in 6 or 24 months’ time, she said that the economy may return to a state where property transactions and prices reflect the fundamentals of the Australian economy, as opposed to the current structural changes taking place.
- Nationally, the portion of profit-making sales in the December quarter rose to 88.7%, up from 87.4% in the September quarter.
- The total value of gross profit derived from resold dwellings was $22.5 billion, up 20.3% from $18.7 billion in the September 2019 quarter.
- Losses totalled $766 million in the December quarter, which is 0.16% larger than losses in the previous quarter.
Eliza Owen said,
“The trends in profit and loss making resales are a reflection of recent market conditions.
From June 2019 to February 2020, the Sydney and Melbourne housing markets experienced a remarkably strong rebound from the previous downswing, with Melbourne dwelling values even reaching a record high by February.
Most of the smaller capital cities and major regional centres also showed a rising trend in housing values through the second half of 2019, albeit not as significant as Sydney and Melbourne.”
While profit making sales continued to increase as a portion of sales in the December 2019 quarter, the figures are still down from the peak of profit making sales in 2017, when up to 92.0% of all resales were turning a gross profit.
This is a reflection of peak housing market conditions on the east coast, while the mining-based housing markets had not seen as much of a decline.
Houses continued to show increased incidence of profit at resale, with 91.0% of house sales making a gross gain, compared with 81.9% of units.
Regional areas saw slightly better performance than the capital city regions, with 88.6% of capital city sales making a nominal gain, compared with 88.8% of regional properties in the December quarter.
According to Eliza Owen, in the coming quarters, no region would be unaffected by a rise in unemployment, and a slowdown in business activity.
“This is likely to create downward pressure on property values as income and borrowing capacity is limited and sentiment levels drop. However, it is also worth noting that many prospective vendors are likely to hold off selling in the current environment.”
“Loss making sales could increase proportionally as those that sell are doing so out of necessity, even if it means accepting a loss. Some regions with a high concentration of households in accommodation and food services or the tourism sector are likely to see a larger impact on housing markets, and the portion of loss making sales.”
For the fifth consecutive month, national loss making resales trended lower over the December 2019 quarter, to comprise 11.3% of all resales over the three month period.
Several factors delivering increased sales profitability since midway through 2019included:
- Reductions to the cash rate, which was halved between June and October 2019;
- Changes to serviceability assessment, which saw increased borrowing capacity for most buyers;
- The re-election of the coalition government which removed uncertainty around taxation reform; and,
- Pent up demand from owner-occupiers where a large cohort of Australians are moving through the first home buyer and the ‘upsize’ age cohort.
From the trough of the market in June 2019, the CoreLogic home value index showed a 5.8% increase to December.
This was led by a 9.9% increase in Sydney dwellings and 9.6% in Melbourne over the period.
Nationally, gross profits for the December quarter totalled $22.5 billion.
This dwarfed gross losses, which totalled $766 million.
In the capital city bounds, loss making sales comprised 11.4% of sales, while in regional areas it was 11.2%.
This represents a decline in the portion of loss making sales across both markets.
Regional markets saw a lower portion of loss making sales, portion is declining faster in the capital city markets.
The decline in loss making sales was 1.3 percentage points across the capital cities from the September quarter, compared with 0.8% in regional markets.
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Eliza Owen said this dynamic is linked to patterns in capital growth.
From the market trough in June last year to December, the capital city dwelling market increased 7.0%.
From the market trough to December 2019, regional markets increased just 1.4%.
“On aggregate, the regional market has not been as volatile as the capital cities. Capital city markets tend to have higher peaks and lower troughs, which may explain why the value rebound, and decline in loss making sales, has been steeper in capital city markets.”
“Before the onset of the coronavirus, capital cities may have continued this trajectory, showing fewer loss making sales than the regions. However, with COVID-19 potentially creating a blunt shock to demand, this trajectory may be interrupted over 2020.”
In the December quarter, the improvement across capital cities was broad based, with a lower proportion of loss making resales recorded in each of the capital cities except for Hobart, where loss making resales have been tracking close to historic lows.
Changes to the portion of loss-making sales are summarised in the table below.
|Portion of loss making sales - December 2019 quarter||Portion of loss making sales - September 2019 quarter||Change (percentage point)|
Most regional areas have seen a decline in the portion of loss making sales.
Some regional areas, such as Newcastle and the Gold Coast were already enjoying a spill-over in demand from nearby major metropolitan centres.
Other regions, such as parts of Outback WA, were seeing slight market improvements off the back of a stabilisation in mining investment.
According to Eliza Owen, the data suggests that the majority of sellers reaped gains from property resales in the December quarter.
“As housing activity is disrupted due to weaker economic conditions and social distancing policies related to curving the spread of coronavirus, profit making resales could become less common in 2020. However, whatever downturn is to be endured in property over the next 6 months to a year, it follows a decade of strong growth rates. As with the results in the December quarter, profit making sales are more common where hold periods are higher.”
Nationally, a high portion of houses (91.0%) 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 37.7% 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.