Perth and Adelaide Lead Australia's Resale Profits

One of the biggest risks is that trade tensions can escalate quite quickly in the future. That can hurt the housing market, particularly through its impact on consumer sentiment. I think the pool of first-time buyers is going to increase. It's going to have quite a material impact on the markets. It will potentially create a bit of a situation where those that get in early are probably going to benefit the most.

There's always a risk that there will be changes to those tax systems, particularly on the capital gains for investors, as well as the negative gearing. Welcome back to another episode of The Property Nerds. I'm your co-host, Arjun Paliwal, Head of Research and CEO of InvestorKit Buyers Agency. And today, we're joined by a fellow nerd, Dr. Joel Bauman from the team at Domain, is here to talk to us about Domain's recent research on profits and losses, what's happening across Australia, which segments have had some great resale profits, and amongst all the different challenges that COVID, interest rates increasing, borders shutting, or markets shifting in sentiment, what has that done to delinquency rates?

What has that done to profits? What has that done to resale impact? We unpack some of the things here alongside the resilience across housing markets with Dr. Joel Bauman from the team at Domain. Let's get straight into it.

Nerd alert! Property Nerds, the home for data-driven property investors, where we uncover Australia's hot and cold markets, latest headlines and trends. Dr. Joel Bauman, welcome to the show, my friend. Thank you so much.

Thank you for having me. Well, mate, we are massive fans of the data at Domain. And the cool thing about today is we're just down the road from each other in the studio as well, so not too far of a trek for you? Yes, it's good. Yeah, glad it worked out.

Well, mate, we wanted to get into some of the data around, you know, resale profits, which is a key focus because I think it goes against all the doom and gloom statements many people have when we see how well Aussies are doing against property or looking at property in their portfolios and their resale values. But Perth and Adelaide are big standouts when it comes to the resale profits there. What do you feel has been a key part of the drivers for these two markets in comparison to the slower ones in Sydney and Melbourne when it looks at their resale profit values? Yeah, so for Perth and Adelaide, what we've seen is a dramatic increase in house prices over the last few years. So we've seen house prices in both Adelaide and Perth up around 80 to 90 percent, so quite remarkable.

And that's in contrast to Sydney where prices are up around the 50 percent mark. So what we've seen is that given the strong uplift in prices, that's starting to filter through into really strong profits. And when people do sell, they're getting a pretty hefty profit when they do. In terms of the profits, kind of the prices, what's actually driving that? So in Perth, I think a big factor there is the strong economic kind of fundamentals.

So incomes are rising, the unemployment rate's really low, and you've had a dramatic surge in population where it's just been really difficult for supply to keep up. And you can kind of see that with vacancy rates less than 0. 5 percent, which is really low given that we typically like to see vacancy rates around the 2. 5 percent range before we kind of classify it as being in balance. So that's all put a dramatic upward pressure on prices there, and that's flowing through into profits.

For Adelaide, it's really been the standout market since the pandemic, and we're seeing that flow through with the profits as well. So for both houses and units, they're up 90 percent since the pandemic. I think a big factor driving kind of the Adelaide market was kind of conditions just prior to the pandemic. I think it was one of the most kind of affordable cities then, and then with the economic conditions following the pandemic, with the dramatic lowering of the kind of the interest rates, conditions were ripe for the markets to kind of pick up in a big way. So affordability wasn't as much of a break on the market compared to a lot of the other kind of capital cities.

Although in saying that, I think it'd be hard-pressed to say Adelaide's an affordable market now. We've got the typical prices in Adelaide are very close to the likes of Melbourne now, which is quite a dramatic shift. So looking ahead, although profits have certainly surged, we're starting to see some early signs that conditions are cooling there. Yeah, that's some really strong insights on those two markets. I think just going into those two a little bit deeper before I hand over to some of the other guys on some insights, I've been a huge fan of the Adelaide market going back many years and the results that's produced for so many of our clients.

But I feel like stigmas sometimes really make people miss out on opportunities as you've seen the numbers you quoted between Perth and Adelaide versus Sydney and Melbourne over the last five years. What do you feel it is that investors need to maybe consider more to avoid these broad blanket statements? For example, the sleepy city of Adelaide or not much going on there. And just typical Aussie casual lingo that goes on and these labeling. But then we look back and we go, hold on a minute, you could have been almost twice as much ahead on your portfolio on an investing decision if you took back five years ago how markets like Adelaide had done.

What do you say to those people? Because you're the barbecue's most popular person when it comes to your expertise and data. So what do you say to those people who have a thought that's already thought of before? They see all the numbers. Look, I think it's just kind of natural when people are looking to invest.

It's very easy to gravitate towards what's familiar. So the street around the corner, they know those markets. But I think this is where these podcasts are really great. So in terms of getting the data out there and increasing awareness of the possible investments that people can actually make. So when they are making the investments, they can consider a broader range of markets and assets so they can actually make better decisions which will kind of set them up better.

And I also think in terms of the stigma, I think even just showcasing the data, Adelaide has been the strongest performing market in both houses and units since the pandemic. 90% price growth, which is dramatic. So as I said, Sydney's 50% in terms of houses. And then for the unit market, it's been an absolute standout. So I think with those strong increase in prices, I think it's pretty easy to, I guess, dismiss or hopefully shift some of the stigma around that market.

Absolutely. Awesome. It's great to see some of the results that we've had, especially for a lot of clients that have purchased in Adelaide. But if I kind of shift it to the other side of things where results haven't been as good, I've got a couple of stats on two markets in particular. We have Melbourne and Darwin unit markets where they've kind of struggled a little bit.

Yeah. And the numbers that we have here are 73% and 53. 4% of sales turning a profit. So only those percentages compared to your other markets where everything is turning a profit. So do you see these as sort of short-term downturns or do you think that structurally there is something that is really challenging within these markets and a lot of people are going to continue to struggle to take profits out of these markets?

Yeah, that's a really good question. So I think overall the profitability in units is a little bit less. So across Australia, about 90% of property sales during the first half of this year for units turned a profit. So quite a decent proportion, as you highlighted, the numbers are a bit lower in Melbourne being kind of 70, around the 70% range and Darwin a little bit lower than that. I think in terms of why that's the case, again, it comes back to what we've seen in prices over the last kind of five or so years.

So prices in Melbourne for units have been largely unchanged and I think a big reflection of that is just the broader kind of Melbourne market, even in the housing segment, prices have really kind of underperformed there. I think some of the factors driving that is some of the regulatory kind of changes, as I'm sure you've probably talked about a fair bit, some of the changes to the tax system hasn't been as investor friendly and that's certainly dented the prices that we've seen there. For Darwin, it's definitely a very different market there. It tends to be a little bit more kind of volatile given that it's a much smaller city, more of the population is transitory, so you get a lot more kind of people that go there for maybe a few years for work reasons and then they leave, so that kind of changes the market dynamics there. But again, going back to the question, is that a structural kind of issue?

I don't think it is. I think you'd be hard-pressed arguing that there's a structural oversupply of housing in Melbourne or Darwin. Both of them have vacancy rates that are still considered quite low, particularly in Darwin, it's very hard to get a rental. And so if you're thinking about it more broadly from an investment point of view, perhaps those units in Darwin haven't delivered those really strong kind of capital gains, but it's also the market that's attracting the highest yields as well. So yields for units in Darwin are about 8%, so that's almost double that compared to what you get for a Sydney unit.

So although you may not get those capital gains, you're perhaps getting kind of more cash flow, so you get those cash flow benefits as well, which could negate that to some extent. Do they have like a lower supply of units in general, Darwin? In terms of the composition, I think it's... I'm just trying to think of how they can with the Trump administration, what they're going to do next week, let alone in six months' time. So I think there's always a risk that the trade tensions can escalate quite quickly in the future.

That can hurt the housing market, particularly through its impact on consumer sentiment. So our consumer sentiment here has been tracking higher over the last kind of, well, it's currently on a two and a half year high, but there's always a risk that an escalation in those trade measures offshore could dent consumer confidence here, make people less confident to go out and transact, and that could weigh on economic activity. So I think that's the big one. Good point about the regulations. I think there's been growing risk that there will be some changes on the regulatory and tax front.

I knew he was going to say that. As he was talking about the first point, I was like, oh, he's not going to bring up labor and negative... He started talking, I was like, oh, here we go. Look, it's, you know, over the last month, we've had the economic roundtable in Canberra. So that's been a collection where you've had the top policymakers, economists, business, you know, union kind of officials as well, discuss ways in which we can lift kind of productivity.

And a big component to that is... Tax. Tax. And so, like, how do you actually go about changing that? So, and I think especially in terms of the growing awareness about the intergenerational kind of equity as well, growing pressure in terms of addressing the decline in home ownership, how do you go about kind of doing that?

And so I think there's always a risk that there will be changes to those tax systems, particularly on the capital gains for investors, as well as the negative gearing set up. So I'm not expecting that's going to be a big change in the near term, but I think the risks of a change to those settings are probably increasing. And if there are changes, I suspect that the way in which they are implemented will have a big impact. So, for example, maybe the market, the near term market impact may be mitigated if some of these are grandfathered, which I would expect a lot of them kind of would be. And then the other one is just in terms of the credit policies as well.

So the housing market, I think we're gearing up for a very busy spring selling season. We've got people's incomes are rising. You've got a structural undersupply of housing, lower interest rates. Domain's just recently put out some research which has highlighted that prices typically increase by 2% extra during the spring selling season compared to other times of the year. And then combined with that, the government's just pulled forward the announcement about the lenders mortgage insurance or the home guarantee scheme, which removes the need for a lot of first-time buyers to purchase lenders mortgage insurance.

So I think all of that will gear up. We may see activity increase in a pretty material way. If that's the case, there's always a risk that APRA may step in and tweak some of the lending rules down the track in order to potentially offset or take some of the heat out of the market. But again, I think that's probably like a minor risk. It may affect some certain market segments more than others.

Now, the anticipation on the October 1st changes coming up for first-time buyers, that is huge. We're talking no income limits, no caps, large price points across many parts of the country. And we're talking first-time buyers everywhere, which by the way, even pre these caps, home buying lending through ABS indicators from owner-occupies has been pretty healthy. And the first-time buyer segment also has been pretty healthy. And so when you look at that, this is another massive firepower in terms of first-time buyers.

But does it feel like a just, you know, first in sort of gets all of this and then prices really do follow and flow on? What's the analysis or thought been from domain side when it comes to incentives, first-time buyers, things like that? Look, it's a very good question. So look, our thought is that it's going to have quite a material impact on the market. So lenders mortgage insurance can be quite costly for first-time buyers.

I think one of the largest barriers to getting first-time buyers through the door and onto the property ladder is that the deposit barrier. And this has a massive impact in terms of reducing the need to save as large of a deposit. So we think that will lead to a much larger segment of the first-time buyers kind of coming to the market all at the same time. So I think the pool of first-time buyers is going to increase because they don't have to save as much. And then the capacity to pay will also kind of increase.

And as you mentioned, some of those price cap thresholds are quite, I think, are quite generous. So people can buy a home worth one and a half million dollars in Sydney under this scheme. So I think that will lead to a large increase in demand. And this is also in an environment where we've got a structural undersupply of housing as well. So I think it will potentially create a bit of a situation where perhaps those that kind of get in early are probably going to benefit the most as those increases in prices, which are likely to result from some of these measures, will potentially negate some of the near-term benefits.

We've seen the top end of the market represent really strongly in the profit side, but also on the losses side, we've seen many top end of the markets as well represent itself on both ends. So when it comes to premium or prestige property, is it more prone to shocks and gains in environments of macroeconomic changes based on some of the reporting or the profit and loss things that you've seen? Yeah, that's a good question. So I think in terms of why they kind of dominate the top of the list is just because of the price points. So if you're thinking about the nominal change, so if you've got the same percentage kind of change, it's just going to have a bigger impact in dollar terms at the upper end of the segment compared to at the lower end of the segment.

In terms of whether they're more susceptible to those ups and downs, I think in terms of looking at the analysis about the duration and the size of the peaks and troughs, I think there isn't a material difference between how the cycles behave between the upper and the lower segments. So for the city market, the upper end is the most interest rate sensitive in the near term. And this time around, it looks like there's no exception to that. So the upper end of the market has been quite responsive to those lower interest rates. And that indicates that the lower end or the middle to the lower end segments are likely to follow in the near term as well.

Absolutely. And I think the upper end of the market, and correct me if I'm wrong, this is just a hypothesis or a bit of an anecdotal thought. When that market moves, sentiment must play a huge part. Because I think capability isn't as difficult for that end. Because if you're at the upper end of the market, you're at the upper end of earners, you're at the upper end of cash savings, you're the upper end of desire, the upper end of dream homes, like all these thoughts that come into the mix.

So my thinking is like they're much more sentiment focused, where if I don't feel good about it, transaction volumes just come off. But if they feel good about it, well, whether interest rates are quite high, they might still have the money and the ability to do so, which is why over so long, we continue to see some smasher sales in some areas, even in different macro environments. And it's just interesting to see. Do you think sentiment plays a key role in some of the upper end of markets more so in comparison to lower end? I think just in terms of the timing of the markets, I think that certainly has an impact.

I suspect you're right that at the upper end of the market, I think people have perhaps more discretion on terms of when they go ahead and transact. So compared to at the bottom end of the market where people may need to transact out of necessity because of a job change or financial pressure, et cetera. So I think you certainly do see the transaction volumes more sensitive to those conditions. And perhaps the upper end is kind of more kind of attuned to that as well. Following the economic data, they know when lower interest rates are coming through and the impact on borrowing capacity, opening up other kind of investment opportunities as well.

So you've also got the fact that they may be more attuned to the changes in kind of conditions and kind of burst out of the gates to be able to kind of adjust to those. Absolutely. It will be interesting to see how the bottom end responds this time, considering the first home buyer stuff kicking in from October 1st. So really be interesting to see that. Joel, we talked earlier about the different amounts of profits that could be taken within the new unit markets and how that was sitting a little bit lower compared to houses.

And the numbers that we've pulled is that less than 4% of houses when they've sold haven't turned a profit. So they're the ones that have made a loss, which is a very small percentage contrasted to the unit side. A lot of the conversations that have been had years and years ago when the interest rates were starting to creep up and were getting higher was that there'd be a lot of distressed sales and people would be struggling with the repayments and they would have to sell at a loss. What do you think has sort of been the counterweight against that thought? Because as we've seen from the data, most people are making a lot of a profit when it comes to the houses that they're holding, even with these interest rates being quite high.

Yeah, you are right. There appears to be very few kind of distressed sales. The vast majority do make a profit.