According to BIS Shrapnel’s Outlook for Residential Land, 2008 to 2013 report series, the cost of land in Australia has outpaced the growth in house prices in recent years. Along with substantial rises in interest rates in 2007/08, this has impacted on demand for new houses.
The report series found the Sydney and Perth land markets continued to weaken during 2007 and the South East Queensland markets of Brisbane, the Gold Coast and Sunshine Coast had their recovery snuffed out in 2008. Similarly, the Melbourne and Adelaide new house markets have also showed signs of slowing in 2008 after recording solid growth in 2007.
“The total increase in housing interest rates of 1.4 per cent in 2007/08, including those independent of the Reserve Bank, have taken their toll on the demand for new housing,” says Senior Project Manager and Report Series Author, Angie Zigomanis.
“Despite the easing of interest rates in September 2008 and an increase in the level of underlying demand for land, we are expecting little change in new house and land purchases during 2008/09.”
However, this deterioration will result in a build up of demand across all states, which is expected to boil over into strengthening new house and land activity from 2009/10.
“Further decreases in interest rates over this period and the restoration of confidence after the settling of financial markets is expected to stimulate increased buyer activity,” says Angie Zigomanis.
“Nevertheless, this improvement will vary nationally, depending on overall affordability in each market, and the level of pent up demand.”
As the affordability of land in Sydney has deteriorated, the number of lots released has declined to less than 3,000 lots per annum since 2003/04, down from peak of nearly 9,000 lots in 1999/2000.
As a result, lot production is now at a similar level to that of Adelaide. BIS Shrapnel expect this level will be maintained in the short term as the combination of affordability constraints and the cost of development conspire to prevent the development of greenfield land.
“This has resulted in new dwelling construction in Sydney falling to levels not seen since the 1950s,” says Angie Zigomanis.
“Affordability issues will also encourage a shift to less expensive medium and high-density dwellings, and to infill and knockdown development in established areas.”
Despite the amount of land zoned for subdivision as part of the Metropolitan Strategy, BIS Shrapnel warn the actual take up of this land will eventually be demand driven and constrained by the lack of affordability.
The possibility of a further correction in prices in Sydney to ‘meet the market’ is limited due to the inability of developers to profitably subdivide land at current market prices due to rising development costs.
After the greenfield land cost, development costs and government charges, many developers cannot make an effective margin at current values, and BIS Shrapnel expect developers will hold back on development until demand improves and lot prices rise sufficiently to make development viable.
While some improvement in new land activity has been apparent in North Western Sydney, where general incomes are higher, activity in South Western Sydney and the Central Coast has been much slower to pick up.
This disconnect between affordability and land construction costs will prevent any significant increase in lot production until rises in income growth make the affordability equation more attractive to purchasers.
BIS Shrapnel forecast lot production in Sydney will increase minimally in 2008/09, before rising by 32% in 2009/10, although from the very low base, with further increases forecast through to 2011/12.
Land production is expected to rise to a peak of 6,600 lots by 2011/12, as outer Sydney accommodates much of the upturn in new house activity.
Nevertheless, this remains below the 7,600 lots per annum average over the five years to 2001 and highlights the issues in taking sufficient land to market in Sydney.
BIS Shrapnel report lot production in Perth has almost tripled from a low of 4,700 lots in 1996/97 to 13,500 lots in 2005/06, due to increasing underlying demand through higher wage growth and increased migration inflows.
“The combined outer Perth and Peel region, where the majority of housing development occurs, experienced strong increases in lot production and growth in median house and land prices between 1996/97 and 2005/06,” says Angie Zigomanis.
“However, the 143 per cent increase in the median house price and the 205 per cent increase in the median land price during 2002 to 2007, have caused a deterioration in affordability that has seen new housing activity decrease significantly. This has flowed through to lot production, which declined by 22 per cent in the two years to 2007/08, with a further fall of six per cent forecast for 2008/09.”
Nevertheless, with strong population growth continuing to come through and drive strong underlying demand, the 10,300 lots forecast to be produced in 2008/09 is 33% greater than lot production in 2001/02, when the upturn began.
BIS Shrapnel expect the turnaround in lot production to start from 2009/10, when a correction in median land prices, combined with easing interest rate conditions, will result in improved affordability and stronger demand.
New house activity in Brisbane has been weakening in the first half of 2008 in response to rising interest rates through the financial year.
The sharp growth in house prices during 2006 to 2008 has caused a further deterioration of affordability that has offset the momentum in the market from strong wages and employment growth.
In addition, the weakening national economic environment and state house markets are likely to discourage interstate movements into Queensland, which BIS Shrapnel note are important drivers of demand.
BIS Shrapnel expect this softening to continue into 2008/09 resulting in a modest decline in lot production. This is despite the continued increase in underlying demand due to record levels of net overseas migration inflows.
Nevertheless, BIS Shrapnel expect this higher underlying demand to cause an upturn in new house and land activity from 2009/10 as interest rates continue to ease, and the uncertainty in financial markets stabilises. Growth in metropolitan Brisbane lot production is forecast to increase by 27% over the three years to 2011/12.
Demand for land on the Gold Coast rebounded in 2006/07 as land prices eased. This region had seen sharp declines in demand during 2004/05 and 2005/06 due to land prices more than doubling in the three years to 2003/04.
However, the pick up in 2006/07 proved to be fragile, as rising interest rates reversed the improvement in affordability, with new house approvals weakening by an estimated 11% in 2007/08. At the same time, new lot production is estimated to have fallen to its lowest level since 2001/02.
BIS Shrapnel note that the decline in land activity has been overdone. The significant decline in lot production in 2007/08 suggests that land ‘on the ground’ has been absorbed, and lot production will have to increase in 2008/09 to a level that will accommodate expected new house commencements.
In addition, high underlying demand and a deficiency of dwelling stock will maintain increased demand pressure on the housing market on the Gold Coast, evident by the low vacancy rate.
Consequently, BIS Shrapnel forecast reserved growth in both new house activity and lot production in 2008/09, particularly with a further reduction in interest rates expected in early 2009. More significant increases in activity are expected from 2009/10 as purchaser confidence returns to the market.
Sunshine Coast lot production has weakened considerably since peaking in 2003/04, when land prices also peaked. After a high of 3,700 lots in 2003/04, land production bottomed out at a low of 2,000 lots in 2006/07.
BIS Shrapnel note a significant component of demand in the Sunshine Coast market is empty nesters aged 55 and over who are selling their existing homes and embarking on a sea change.
However, weak residential markets in the eastern states during 2004 to 2007 prevented this trade over in dwellings. House prices and turnover improving in Brisbane and Melbourne in 2007, encouraged movement to the Sunshine Coast, with new house and lot production each increasing by an estimated 20 per cent during 2007/08.
With signs that the residential markets in both Brisbane and Melbourne are slowing, and that Sydney will remain weak, growth in new house and land activity is expected to again weaken in 2008/09 on the Sunshine Coast.
Lot production is forecast to remain flat in 2008/09, before increasing steadily from the following year to peak at 3,300 lots in 2011/12, as stronger growth in residential prices in the eastern state capitals returns from 2009/10. This will again encourage empty nesters to sell up and migrate to the Sunshine Coast.
Although softening in the first half of 2008, more affordable land prices compared to some of the other Australian capitals has meant the new house market in Melbourne has not worsened to the same extent.
Self-effacing growth in lot production occurred in 2007/08, although this growth is expected to slow considerably in 2008/09 as higher interest rates and the impact of the deterioration of financial markets dampens sentiment.
In comparison to previous years, where lot production outpaced the number of new houses being built, supply of new lots is now being driven by demand.
BIS Shrapnel forecast activity to increase significantly from 2009/10, driven by the strong underlying demand for new dwellings, which is underpinned by strong levels of overseas migration.
“The affordability of land relative to house prices means that new house/land packages in the outer suburbs of Melbourne are among the most affordable of the capital cities,” says Angie Zigomanis.
“Together with the solid population growth driving underlying demand, this will prompt an acceleration of new house approvals as interest rates continue to ease and financial market conditions improve, subsequently resulting in an increase in new lot production and ultimately land prices.”
In line with the improvement in residential construction activity, lot production in outer Adelaide has increased from an estimated 2,500 lots in 2004/05, to 3,400 lots in 2007/08.
This increase has been underpinned by strengthening underlying demand in the Adelaide market due to significant increases in overseas migration inflows.
During the last two years, median land price growth has been below median house price growth, which has maintained the attraction of house/land packages relative to established housing.
This is also a likely factor behind new house activity in the Adelaide market continuing to show some resilience in 2008, despite the rises in interest rates over the last 18 months.
Nevertheless, the increase in housing interest rates in 2007/08 will have a dampening effect on the market through 2008/09, with both new house and land activity expected to remain flat.
Moderate growth is forecast to come through from 2009/10 as lower interest rates result in improved affordability and increased demand, with new lots produced forecast to peak at 3,900 in 2010/11.