Property profits hit 14-year high
More vendors sold at a profit in the March quarter although the size of their windfall gain shrank amid the seasonal decline in sales, CoreLogic’s latest Pain and Gain report shows.
The proportion of profit-making residential sales ballooned to 94.3 per cent nationwide, the highest level of profitability in 14 years, boosted by the persistent increases in home values, which outweighed weakness in the economy and higher mortgage rates.
More than 80,000 vendors raked in a total of $28.5 billion gross profits. However, this was lower than the $30.6 billion recorded in the December quarter. The median profit also fell by 1.1 per cent to $265,000 during the same period.
Eliza Owen, CoreLogic’s head of research, said the share of profit-making sales may increase further in the June quarter as values climbed higher.
“Profitable sales are likely to rise in what’s already a highly profitable market,” she said.
“This is in line with home values rising by a further 1.9 per cent in the three months to May. However, market conditions remain diverse, with loss-making sales rising across Victoria and Tasmania. Weaker economic conditions may also contribute to more short-held, loss-making sales.”
Brisbane and Adelaide topped the most lucrative cities for vendors with 98.4 per cent of all sales delivering gross profits.
Perth held on to its position as the fifth most profitable capital city above Darwin, Melbourne and Sydney, as the share of homes selling for profit climbed to 93.6 per cent, which is the highest in more than nine years.
Consequently, the portion of unprofitable sales in Perth slumped to just 6.4 per cent, down from a high of 43.8 per cent in the June quarter of 2020.
“Perth had shown a remarkable turnaround in the past few years as loss-making sales continued to shrink, and it’s overtaken Sydney and Melbourne,” Ms Owen said.
“For people who bought in 2014 and had gone through this extended downturn, they can finally recoup some of that loss.
“The Perth market will most likely see a further increase in profitability for the June quarter and conditions are excellent for sellers after home values climbed by 6.1 per cent in the past three months and had increased by 22.1 per cent in the past year.”
Fall in home values
Melbourne became the second-least profitable market of the capital cities behind Darwin, posting the highest rate of loss-making sales of the capital city markets at 9.2 per cent of all sales, up from 8.9 per cent in the previous quarter. This coincided with a 0.5 per cent decline during the first quarter.
Ms Owen said profitable sales were unlikely to rise in the coming quarter after home values fell a further 0.2 per cent over the past three months as listings rose faster than they were being absorbed.
While profitability across Sydney held steady at 91.6 per cent of all home sales, it had fallen from the recent high of 96 per cent recorded in the three months to October 2021.
“The higher interest rates and weaker demand amid affordability constraints have led to a bit of a drag on Sydney’s profitability, and it’s now the third least profitable city, behind Darwin and Melbourne,” Ms Owen said.
“However, Sydney home values hit a fresh record high in June, and the three-month growth rate in values had increased to 1.2 per cent over the past three months, which will likely create an uplift in the rate of profit-making sales for the June quarter.”
Profitability for Sydney units deteriorated to 87.1 per cent in the March quarter, down from 90.8 per cent at the onset of the pandemic. Similarly, the share of profit-making unit sales in Melbourne fell to 81.1 per cent from 86.9 per cent during the same period.
However, the portion of profitable unit sales increased sharply across Brisbane, rising to 96.8 per cent of all sales, up from 63.3 per cent in March 2020.
Profit-making unit sales also surged in Perth during the March quarter, jumping to 84.4 per cent from just 45.3 per cent four years ago.
Across Australia, 89 per cent of all unit sales delivered a profit, up from 88.1 per cent in the previous quarter, boosted by the 1.2 per cent increase in national unit values during the three months to March.
Ms Owen said while the rate of profit-making unit sales may become higher in the short term due to affordability constraints in the house segment, the median nominal gain from house sales far outweighed that of units due to the premium over land value.
In Sydney, the median nominal gain for house sales was $600,000, which is three times higher than units.
Across Melbourne, houses made a median gain of $405,000, more than twice that of units, which raked in $154,750 gross profits.
Similarly across Brisbane, Perth, Darwin and the ACT, houses delivered more than double the profits achieved by units.
“Generally speaking, the windfall gains from house sales create a far better wealth outcome for those that managed to buy into the detached house segment than those reselling units,” Ms Owen said.
“While more units delivered profits, houses continued to amass higher overall gains. This highlights a new aspect of the ‘haves’ and ‘have nots’ of real estate.”
Source – Australian Financial Review
https://www.afr.com/property/residential/property-profits-hit-14-year-high-20240624-p5jocg