Rising mortgage payments drive home owners to sell at a loss

According to CoreLogic’s latest Pain & Gain Report, the percentage of dwellings making a nominal gain from resale decreased for the third consecutive quarter, reaching 92.3 per cent in the first three months of the year.

This decline in profit-making sales coincided with the national housing market downturn, which is believed to have reached a trough in February 2023.

The report analysed approximately 76,000 resales, revealing a 4.6 per cent increase in loss-making sales over the period. The number of resales also declined by 6.5 per cent compared to the previous quarter.

The total nominal profit from resales in the March quarter was estimated at $22.7 billion, down from $25.9 billion in the previous quarter and a record high of almost $40 billion in the December quarter of 2021.

The median nominal gain for resales across the country was $276,500.

CoreLogic head of research and report author Eliza Owen suggested that the faster pace of profitability deterioration in recent months could be attributed to sellers choosing to incur a loss in order “to avoid high mortgage repayments” in the current rate-hiking environment.

She noted that changes in profit-making sales typically correlate with the capital growth trend, making it unusual to see a sharper decline in profits during a quarter when prices were starting to stabilise.

However, she also acknowledged that this may be linked to an increase in short-term selling, as more properties were resold within two years of ownership.

For example, an increasing number of March quarter resales had been owned for less than two years.

“Those that sold for a nominal gain increased to 8.4 per cent from 6.6 per cent in Q1 2022, while the portion of loss-making resales with a hold period of less than two years jumped from 3.4 per cent in March 2022 to 12.4 per cent for the same quarter this year,” Ms Owen said.

“Such short selling times that involve sellers incurring a loss may be considered unusual, because hold periods typically increase during housing value downturns, as sellers try to avoid making a loss.”

However, she noted that the gains from residential resales in Australia remain substantial overall and the rate of loss-making sales was relatively contained at a national level.

Despite this, the uncertainty around the outlook for profitability in residential real estate remained high and that could further motivate sales, even when a loss is incurred.

“There may be some motivated selling reflected in the next few quarters where property owners willingly sell at a loss to avoid rising mortgage interest rates,” she said.

Profit-making sales highest in Hobart

The report highlighted mixed results across different capital cities in terms of profit-making sales.
Hobart had the highest rate of profit-making sales, with 99 per cent of resales making a nominal gain, followed by Canberra and Adelaide at 98.1 per cent.

Brisbane witnessed a slight increase in profit-making sales to 95.7 per cent in the quarter.

On the other hand, Darwin, Perth, Sydney, and Melbourne experienced higher rates of loss-making sales, with Darwin marking the highest rate at 29.5 per cent, followed by Perth at 13.8 per cent.

Sydney reached its highest level of loss-making sales since August 2009, reaching 10.7 per cent in the March quarter.

[Related: New home sales up for second consecutive month: HIA]