The flip side of the market
The practice of buying and selling a house within a short period seems to be in decline, writes Miriam Bell.
Residential property trading has long been labelled a contributor to the housing crisis, but new data suggests ‘‘flipping’’ is now a minority practice.
New CoreLogic data shows that the number of properties being resold after being held for less than a year has dropped to a tiny percentage.
CoreLogic analysed the percentage of short-hold resales nationwide in the first quarter of every year for the past six years. In 2015, short-hold resales accounted for 2.9 per cent of resales.
That rose to a peak of 3.8 per cent in 2016 and short-hold resales have been declining ever since. In the first quarter of this year, just 2.1 per cent of resales were properties held for less than a year.
The decline is even starker in Auckland which, traditionally, has had a higher prevalence of ‘‘flipping’’ than elsewhere. At the peak in 2016, short-hold resales made up 6.6 per cent of all resales in Auckland. But this year just 1.7 per cent of the region’s resales were of properties held for less than a year.
CoreLogic chief property economist Kelvin Davidson says this suggests flipping is relatively rare, especially as the data includes short-hold resales by owner-occupiers as well as investors.
There is a perception that lots of people are property flipping but, in aggregate, the numbers do not suggest a major problem, he said.
‘‘While property trading will always be a part of the market, its prevalence has declined in recent years and there’s no doubt the bright-line test has played a role in that.’’
The bright-line test taxes profits made on the sale of properties (other than the main family home) within a certain period.
First introduced by the National Government in 2015, it initially applied to sales made within two years, but the Labour Government extended that to five and now 10 years.
Davidson said, even as prices have skyrocketed over the past year, the bright-line test had been a deterrent for many property ‘‘flippers’’ as it reinforced that tax had to be paid on trading profits.
‘‘Public perceptions of flipping have changed and got harsher, so that may have had an impact on small-scale, parttime traders who were flying under the radar.
‘‘Also, given the increased focus on boosting housing supply via intensification, I wonder whether many professional traders might be focusing on development and repurposing opportunities more these days.’’
Although the tax regime has got tougher, there are still profits to be made in flipping properties. CoreLogic’s data shows there was a median gain of $120,000 in this year’s nationwide short-hold resales, and a median resale gain in Auckland of $148,000.
But professional trader Tom Faye says it is a risky business and that for people to successfully ‘‘flip’’ properties it is now necessary for them to be experienced and skilled in what they are doing.
In the past, about 80 per cent of property flips were done by first-timers looking to raise capital through quick gains, but people have been scared off by the bright-line test, high tax rates and loan-to-value ratio deposit requirements, he says.
‘‘People struggle to get their head around how it will work for them financially and that means the number of new entrants to the trading market has declined considerably.
‘‘For experienced traders, holding costs have increased, but the current market means fewer properties need to be traded to make the same amount of gains as in the past.’’
Another significant factor has been in the type of buyers picking up the properties being traded. Investors looking for rental properties have been replaced by owner-occupiers, particularly first-home buyers.
Faye says this has a number of knock-on effects. One is that fewer ‘‘flipped’’ houses are coming back on to the rental market, which decreases the available rental stock and puts further pressure on rents.
‘‘The other is that I’ve shifted my focus from two-bedroom units, which are good for rentals, to three- to four-bedroom homes better suited to owner-occupiers. These properties cost more to buy and renovate, so the resale price is higher. That impacts on house prices.’’
However, the renovations which are a part of property ‘‘flips’’ also help improve the country’s existing housing stock.
Opes Real Estate’s Slade Hocking, who is an experienced trader, says a ‘‘flip’’ means that once-decrepit houses undergo full upgrades to meet the healthy homes standards.
‘‘This is a good thing as it creates one more decent home for either a tenant or an owneroccupier.’’
Recent changes such as the healthy homes standards, the bright-line test and Auckland’s Unitary Plan have kept property traders on their toes and mean they have had to change, he says.
‘‘They have had to adjust to trading in a different climate and in different ways. It’s similar to what we’ve seen as a result of the Covid pandemic: if a business wants to survive, it needs to pivot its strategy.
‘‘But the extension of the bright-line test has a minimal effect on fulltime traders as they were already paying tax and GST on property transactions. It is Mum and Dad investors who renovate and sell a property every few years to enjoy some extra income that are affected.’’
One new challenge could be the current shortage of tradies and building supplies, Hocking says. ‘‘If fewer builders and supplies are available, projects will extend, creating less volume and velocity of projects. This could, potentially, create an increase in prices as demand continues to outstrip supply.’’
There has been a decline in ‘‘flipping’’ in recent years, but Hocking says such transactions will continue to happen in all markets, regardless of the conditions, as when there is a willing buyer, there is always a willing seller.
‘‘While property trading will always be a part of the market, its prevalence has declined in recent years and there’s no doubt the bright-line test has played a role in that.’’
Kelvin Davidson CoreLogic chief property economist
‘‘For experienced traders, holding costs have increased, but the current market means fewer properties need to be traded to make the same amount of gains as in the past.’’
Tom Faye Professional trader