Houses vs Units; which fared better in the latest Pain and Gain Report

With our property markets booming this year a staggering number of property owners made a profit on reselling in the June quarter of this year according to the latest Pain and Gain report.

CoreLogic analysed approximately 106,000 resales of residential real estate nationally, where the latest sale date of the property occurred in the June 2021 quarter to see the proportion of housing re-sales that delivered nominal gains or losses for sellers.

Profitability across both the house and unit market increased with more than nine out of 10 home sellers selling for again, though the incidence of loss-making sales remained substantially higher across the unit segment.

In the three months to June, 15.3% of units sold for a loss, down from 16.6% in the previous quarter, and 21.0% from the same quarter last year.

This compares to a loss-making sale rate of 5.6% in the housing segment, down from 6.6% in the previous quarter and 11.6% in the June quarter of 2020.

Comparing the rate of loss-making sales nationally with the previous quarter suggests that profitability has improved faster in the housing segment over the year, but the unit segment has seen a greater reduction in the portion of loss-making sales over the previous quarter (with the rate of loss-making sales falling 127 basis points in the unit segment, compared to 97 basis points in the housing segment).

Despite the relatively rapid improvement in profitability across units, the rate of loss-making sales nationally remains around 2.7 times higher than in the housing segment.

The past decade has seen an average differential of 6.3 percentage points in the rate of loss-making sales between houses and units.

However, the incidence of loss among unit sales became particularly elevated from early 2018, as shown in the chart above.

In addition to a higher chance of nominal loss in the unit segment, houses have also delivered greater nominal gains than units.

At the national level, the median profit from house resales was $310,000, compared to $155,000 across unit resales.

Weaker profitability in units relative to houses comes off the back of changes to unit demand, coupled with an increase in unit supply in recent years.

Changes to unit demand partly stem from macro-prudential regulation in late 2017, which temporarily limited the portion of interest-only mortgage lending for property purchases.

Interest-only lending was disproportionately utilised by investors, and investor finance for the purchase of housing declined -23.9% between the 2017 and 2018 calendar years.

Because investor demand skews more toward unit purchases, this may have slowed the capital appreciation of some unit markets relative to houses.

Furthermore, demand has been particularly skewed toward houses over units since the onset of COVID-19.

This may be the result of more owner-occupier demand, as well as more time spent at home through lockdowns triggering demand for larger, detached residences.

This has resulted in an appreciation of house values nationally of 18.5% since March 2020, compared with a lift of just 9.0% in the unit segment over the same period.

Additionally, the fall in investor demand through 2017 and 2018 coincided with an uplift in unit completions.

According to ABS building activity data, new unit supply peaked in the December 2016 quarter at around 29,000, but completions have remained at fairly elevated levels for the past five years.

Interestingly, there are early signs that the pace of capital growth in house values is currently slowing faster than in the unit segment.

This may be a result of rising housing affordability pressures in the detached house segment, where combined capital city house values were sitting 32.2% higher than units in August.

The increased price pressures across the housing market may see more buyers pivot to the unit segment in the coming months, and lead to an increased incidence of profit-making sales across units.

Characteristics of loss-making unit sales

Through the June quarter, there were close to 4,900 loss making-unit sales.

Unit sales accounted for 30.1% of resale observations in the June quarter, but a disproportionate 54.1% of all loss-making resales.

The typical hold period for loss-making unit sales nationally was 7.3 years, less than the 8 year hold period for profit-making unit sales.

Almost a quarter of loss-making unit sales (23.9%), were concentrated in the three LGAs of Brisbane City Council, the Gold Coast City Council, and Melbourne City Council through the June quarter.

As a proportion of total sales, loss-making units were actually proportionally lower than the national figure across the Gold Coast (11.2%).

The large volume of loss-making unit sales in this region was more a function of high sales volumes overall.

However, Melbourne LGA has seen an uplift in the proportion of loss-making unit sales through the June quarter, at 39.0%.

This is up from 38.4% in the previous quarter.

The volume of loss-making unit sales reached a peak of 218 in the three months to May 2021 and has eased slightly in the three months to June (203).

As discussed in the previous quarter, this highly concentrated investment market has been disproportionately impacted by COVID-19, due to the closure of international borders.

From March 2020 through the June 2021, rent values across units in the Melbourne LGA have fallen – 21.3%, and overall unit values have increased a relatively subdued 3.3%.

Loss-making unit sales were broadly confined to the suburbs of Melbourne, Docklands, and Southbank.

Loss-making unit sales across the Brisbane LGA accounted for 26.0% of total unit resales in the June quarter, though this has fallen from 27.6% in the previous quarter, and 40.3% in the June quarter of 2020.

This coincided with a 5.0% rise in Brisbane LGA unit values over the 12 months to June 2021.

Across the LGA, the highest count of loss-making unit sales was across the suburbs of Brisbane City, Fortitude Valley, and South Brisbane.

Despite inner-city regions of Melbourne and Brisbane seeing high volumes of loss-making unit sales, the highest proportion of loss from unit resales in the quarter was actually across Perth LGAs, such as across Cockburn Council, where 69.5% of unit resales made a nominal loss.

As noted in the previous quarter, a lack of international migration continues to weigh on rental markets across Melbourne.

The September quarter may show an increase in the proportion of loss-making unit resales across the Melbourne LGA, though volumes could be more subdued due to lockdown conditions during this period.

At the national level, the portion of profit-making unit sales is expected to gradually increase, in line with continued property value increases observed through to August.

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Pain and Gain Report September 2021: National review
Pain and Gain Report September 2021: Investor vs. Owner Occupiers
Pain and Gain Report September 2021: Sydney
Pain and Gain Report September 2021: Melbourne
Pain and Gain Report September 2021: Brisbane

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