Record gains and very little pain for New Zealand property sellers

New Zealand home owners are pocketing a record level of gross profits from property resales as the country’s real estate market defies last year’s weak economic outlook.

CoreLogic New Zealand‘s quarterly Pain and Gain report shows 99 per cent of properties being resold in the three months to June 2021 are making a gross profit.

This is the highest on record, up from the previous high of 98.9 per cent recorded in the first quarter of the year.

CoreLogic’s Chief Property Economist Kelvin Davidson said the extraordinary gains are a stark contrast to the housing market crash predictions made in mid-2020 at the height of COVID-19’s first wave.

In the 25-year history of the data series, he said there’s never been as many resellers, in proportional terms, making gross profits from real estate sales.

“The strength and resilience of the market reflects the support measures for the wider economy that were put in place by the New Zealand Government alongside very low mortgage rates, which have pushed property values sharply higher,” Mr Davidson said.

“The June quarter results are on top of previous gains, which means anyone who’s held their property for the traditional seven to 10-year period will inevitably sell for substantially more than they paid.”

Nationally the median resale gain in the three months to June 30, 2021 was $347,500 – a new record high. In contrast the median resale loss was just $20,000 for the same period.

Mr Davidson emphasised these profits would have been accumulated over many years and not just during the post-COVID phase.

He also noted the majority of owner-occupiers would typically need to recycle the equity to afford their next purchase, which is likely to have also increased sharply in value.

“The current level of pain in the market is more like being tickled with a feather than a serious cut,” Mr Davidson said.

“This may remain the case for a few quarters yet. Anybody who’s owned a property for a series of years should still make a significant profit, even if the low-probability scenario of falling house prices came to fruition.”

The headwinds for the property market have been building in 2021 and include the introduction of 40 per cent deposits for investors, the phased removal of interest deductibility, a lower speed limit for high loan-to-value ratio (LVR) owner-occupier lending and higher mortgage rates.

“With unemployment still low and mortgage rates set to remain well below past norms, an outright downturn seems unlikely, assuming homeowners, especially recent entrants to the market, are aware of the rising interest rate outlook and are making adjustments accordingly,” Mr Davidson said.

Median hold period

Across New Zealand, properties resold for a gross profit in the three months to June 2021 had been owned for a median of 7.4 years.

While the ownership period remained unchanged from the previous two quarters, hold periods for resale gains have reduced since the peak median hold period of 8.5 years was recorded in the fourth quarter of 2015.

For loss-making resales in the three months to June, the median hold period was 3.9 years, up from 3.5 years in the first quarter of 2021.

The hold period for resale losses has been generally rising for a few years, reaching a low of 2.6 years in fourth quarter of 2018.

Property types

“It’s become very uncommon in recent years for houses to make a gross loss at resale, with 0.8 per cent resold for less than the original purchase price in the three months to June,” Mr Davidson said.

“For context, in mid-2001 only 70 to 75 per cent of house resales made a gross profit, and in early 2011 the figure was 80 to 85 per cent.”

The share of apartments resold for a gross profit in the second quarter this year was 92.9 per cent compared to the same period in 2000 when only about 54 per cent of apartment resales achieved a gross profit.

Main centres

In terms of the size of resale gains and losses in New Zealand’s main centres, Wellington was the strongest performer, recording a record high in quarter two and a median resale profit of $535,000.

The median gain in Auckland was $490,000 and $437,500 in Tauranga.

In Hamilton and Dunedin the median resale gain was $360,000 or more, while Christchurch median resale gain was $220,000.

Resale losses were less common in all main centres and far smaller than historical averages. Wellington had a median resale loss of just $9000.

Source: CoreLogic NZ

Pain and gain outlook

The outlook for strong resale values remains robust when compared to previous prolonged periods where gains were recorded.

Resales stayed very high at a rate of 97 per cent or more between 2004 and 2007, and a repeat performance can’t be ruled out this time either.

However, Mr Davidson cautioned these strong profits for resellers predated some of the new macro prudential measures introduced and the August lockdowns.

While the economy and property market have proved capable of bouncing back quickly when restrictions lift, there’s uncertainty around the potential knock-on effect an extended lockdown could have.

“Regulatory pressures have been quickly increased in the past six months, including the looming tightening of the speed limit for owner-occupier lending, which we suspect will hit first-home buyers quite hard,” Mr Davidson said.

“On top of that, mortgage interest rates have already risen and there is plenty more scope for further increases over the next 12 to 18 months.

“That could be problematic for stretched recent buyers, or even existing owners who have traded up with potentially larger mortgages than before.

“Overall it wouldn’t be a surprise to see the Pain and Gain figures soften a little over the coming quarters, but stay relatively strong going on past standards.”

Key findings for June quarter 2021

  • Nationally the proportion of properties being resold for more than the original purchase price (a gross profit or gain) in quarter two 2021 was 99 per cent – an equal record high with quarter one 2021.
  • The size of the median resale gain recorded for the period was $347,500.
  • New Zealand property values have increased 24.8 per cent nationally for the year to July 2021.
  • For those who have owned a property for seven to 10 years a resale profit is almost inevitable.
  • Strong resale gains have been replicated across each of the main centres and provincial markets as well as houses and apartments and by owner-occupiers and investors.
  • The main drivers for the record resale gross profits are tight listings and low mortgage rates.

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