Negative mortgage equity spreads across Australia’s apartment market

CoreLogic’s has released its latest Pain & Gain Report, which shows that more than one-in-five recent apartment buyers across Australia’s capital cities sold at a loss in the March quarter of 2019 – roughly double the level of three years ago:

As shown in the below table, all mainland capitals experienced double-digit loss-making apartment sales in March, with Darwin (-58.2%) and Perth (-49.2%) faring worst and Sydney (-11.0%) faring best:

According to CoreLogic:

For capital city units, 78.6% resold at a profit over the quarter with the share down from 81.8% the previous quarter and 85.7% a year earlier. The 78.6% of units resold at a profit was slightly higher than the previous month, but prior to that, it was the lowest share since the 3 months to June 1997. With housing market conditions continuing to weaken since March 2019, we would expect the share of capital city houses and units reselling for a loss to continue rising…

Units sold at a loss over the quarter were typically held by their owners for 6.3 years.

Not surprisingly, given their larger representation in the apartment market, investors experienced sharper losses than owner-occupiers – 17.0% versus 10.5% across the combined capitals in the March quarter:

With concerns around high-rise flammable cladding and structural defects proliferating, the poison of negative equity will likely spread across Australia’s apartment market.

Avoid this segment like the plague.

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Unconventional Economist

Leith van Onselen is Chief Economist at the MB Fund and MB Super. Leith is an economist and has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.

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  1. Sustralia is just getting heated up for the final chapter of fun before recession

  2. Yes, more destruction of capital.
    As more capital is destroyed, the demand for credit will soften until interest rates are cut yet again.
    And it has gone like this for 30 years and yet the RBA doesn’t see it.
    At the other end we see the destruction of capital with retirees:they can’t get enough interest to live on, so they eat away the seed corn and become dependent on the taxpayer.
    Perhaps the RBA will have a ‘eureka moment’ when they get to minus 4%(-4%) ?
    Probably not.

    • St JacquesMEMBER

      The RBA”doesn’t see it because pf massive cognitive dissonance from supporting bs economic theories that have left our economy high and dry like a beached whale.But they’re a symptom of the total capture of our political system and public institutions by the Big End of Town. Argentina is our future.

      • St JacquesMEMBER

        Well then things are going to be rosy for us because of all that household debt.

      • DominicMEMBER

        The amount of household debt in Argentina is irrelevant. The issue there is the scale of corruption undermining the economy. The Govt takes in tax revenues way smaller than they’d like to spend i.e. they not only have a vast welfare bill but the elites spend most of their energies handing out cash for public works to cronies who then deposit backhanders into the Swiss bank accounts of the bureaucrats who awarded the contracts. You know the crack: you award a $300m contract to your mate for a job that should only cost $100m. Thus the country gets raped, the elites get rich and the gap is filled with printed money which loses it’s value at rapid rate and further impoverishes the average hombre.

      • Paint it Black

        @Dominic. Agree about the level of blatant corruption in Argentina. I lived there for 3 years. I have ridden that infamous motorway from Ezeiza airport many times.

        The point is that when things fail here, the formerly middle class person who is now forced to look in the trash skips in the CBD for dry cardboard and scrap metal to sell will also owe $250,000 after being fire saled out of a worthless crumbling apartment. That wasn’t exactly true of your average cartonero. Obviously that debt won’t be repaid, but just as the people of Ireland found out, that scale of default does not come without consequences.

        We are in a much worse position and will suffer way more pain when the collapse comes. Wait until the US stops sending our alleged first world health service all those wonderful MRI machines, monoclonal antibodies and CAR-T cell treatments because there is no credit on the international financial markets to pay for them and see how it feels.

        And whilst Argentina had its treasure siphoned off materially into swiss bank accounts, we are having ours siphoned off in the form of the admission of a tsunami of elderly non contributing + young non assimilating migrants who see Australia as nothing more than a social service dispensing machine or an easy place to engage in middle range criminal importation enterprises with a lenient justice system if you get caught and a completely optional tax system provided you can transact in any language other than english.

        When the collapse comes, you’ll be grateful that it only took 16 hours for you to get some Morphine for your fractured wrist and 20 hours for it t be X rayed.

        Give it enough time and you will see that what is happening here is no less destructive.

      • “We are in a much worse position and will suffer way more pain when the collapse comes. Wait until the US stops sending our alleged first world health service all those wonderful MRI machines, monoclonal antibodies and CAR-T cell treatments because there is no credit on the international financial markets to pay for them and see how it feels.”

        They are not going to cut us off, because that would fatally undermine the narrative that first-world economies are allowed to run up endless amounts of debt with no consequences whatsoever, and in any case, the elites do not actually care if we pay our debts as long as they remain powerful elites. If Australia fails over household debt then it’s only a matter of time before the US fails over its national debt, so it won’t be allowed to happen. If enough economies like ours tip over then there might even be a global debt haircut.

    • As more capital is destroyed, the demand for credit will soften until interest rates are cut yet again.
      And it has gone like this for 30 years and yet the RBA doesn’t see it.

      You are flat out wrong, Athlone. Demand for credit has grown and grown for 30 years. Demand has never softened. Just more and more demand has been piled on at Lowe rates.

      • Agree, it is collateral that is evaporating rather than capital, and that will create a per capita slowing ahead.

      • @Peachy
        So you think the RBA lowered interest rates in June and July and for the last 30 years because the demand for credit was so strong?
        Very interesting thesis.

    • DominicMEMBER

      You’re shouting at the wind. You see, in modern economic theory, policy makers don’t believe proper capital is necessary at all. They believe they (via the printing press) can create all the capital necessary to ‘run’ the economy.

      Sadly, by the time the awful truth is discovered it’ll be way too late – the amount of real capital destroyed will be all time.

  3. why they are selling?
    they just bought?
    what they were thinking?
    do they deserve it?

    • What were they wearing?
      How many angels can sit on the head of a pin?
      Has anyone seen Trevor?

    • You would be surprised how many people don’t even know if they walked away with a profit after agent fees, stamp duty, strata, interest, repairs, renos and insurance and finally any tax.

    • darklydrawlMEMBER

      Just guessing, but people who (re)sell that quickly are usually either having cashflow issues or relationship issues (one tend to leads to the other).

      • This. Money problems are the no. 1 cause of divorce, and debt is the no. 1 cause of money problems. And property investment is the no. 1 cause of debt. This may be why the relations parties are so busy.

    • Up.

      Don’t you ever learn? So long as a shortage of dwellings persists:

      Apartments up = houses up. Apartments down = houses up.

    • Ever more desirable. You won’t be able to buy a solid house close to the city for love nor money. Bad news for those MBers predicting 60% falls over the next 5 years.

  4. Paint it Black

    As always these are all gross figures only. The prices exclude, stamp duty, interest, rates, strata (+ special levies), commissions, advertising. Add those in and you can easily move another 20% from the gain to the ‘pain’ columns.

    • This is the killer, all those costs add up, even in a flat market you’re bleeding a lot holding a property.

  5. Why are people selling at a loss? Are they investors getting out before the crash, or owner-occupiers who couldn’t afford their new mortgages after the royal commission?

    Surely now that interest rates have dropped and loans are easier to get this selling at a loss will stop?

    • Paint it Black

      Cannot maintain the cash flow out on a negatively geared property due to rents falling + utilities / tolls / healthcare and other sundry rising faster than wages.

      Selling, even at a loss, turns off the tap on negative flow and if not in negative equity at point of sale might put a few thousand back in the bank.
      Remember sale at a loss != negative equity.

      The point being, I do not believe anyone other than Martin North has a real grasp on how much weekly household balance sheets are in the red.

      As for selling at a loss subsiding, if there are more cashed up greater fools to switch places, maybe it will stop. But I doubt it. Falling house prices in an ultra low interest environment (which we have had since 2018, not just the most recent cuts) is a sure sign that all that are left are:

      1. Non fools who can afford to buy but dead set won’t until after a complete collapse e.g 40% falls in Sydney from peak
      2. Fools who cannot scrape up a deposit and/or qualify for a loan

  6. Professor DemographyMEMBER

    This is one of the main reasons for lowe volumes. People are trying to not join the pain column. You can see what just a bit more falling in Perth does to these statistics.

    • Our PM said prices will rise again soon, I just have to wait it out. 😂😂😂

      • He was no doubt talking about houses, not investor grade stock for the Chinese market. He’s right, and even if he isn’t he’ll concoct policies and incentives to make it happen. This is the start of the next house price boom, whether MBers like it or not.

  7. Ronin8317MEMBER

    The number does not reflect the dire situation in Sydney: anyone who settled their off the plan recently would be in negative equity because price peaked around 2015/16 and there is a 2-3 year lag between buying and settlement. Also, the ban on flammable cladding only took place in 2018, so there are many new apartment building that has them.

    While building with combustible cladding need to register with the government, the list will not be made public, and there is no need for developer/builder/strata to disclose it to buyers.

  8. Dale SmithMEMBER

    Is the loss Gross or Net?
    IE a property selling at 1% more than its previous sales price is a Gross gain but once selling costs have been deducted would be a net loss.