Markets for vacant residential land across Australia will remain sluggish in 2023, a leading researcher says.

As part of commentary for the State of the Land Report published by the Urban Development Institute of Australia, Colin Keane, director of greenfield housing market research firm Research 4, gave an overview of the outlook for the greenfield residential land market across the nation.

According to the report, the volume of vacant residential lots sold across Australia dropped by 49 percent during calendar 2022.

This represented a return to relatively normal volumes following a surge in land sales activity which occurred throughout 2020 and 2021. That surge reflected massive levels of demand for new detached housing which were supported by low interest rates and the Commonwealth Homebuilder program.

Despite the fallback in sales, however, median lot prices surged by 20 percent across the year to reach $339,546 amid extremely constrained supply over most of the year.

Encouragingly, the weaker sales volumes in 2022 enabled stocks of available land to recover and to end the year either within or near the band of 3-5 months’ worth of sales which is considered a balanced market across most cities.

During the peak of the boom in 2021 and early 2022, vacant land stocks dwindled to less than one month of trading across several capitals. This placed upward pressure on prices and acted as a break on new development.

(source: Research4 via UDIA State of the Land Report 2023)

Commenting on the overall state of play, Keane said that current market conditions are being driven by two factors.

First, the decline in sales throughout 2022 reflected a correction from the pull-forward in demand which was associated with the Homebuilder program. This had seen record levels of activity in detached home construction (and thus vacant land purchases) throughout 2020 and 2021.

Such a correction will continue into 2023, Keane said.

Second, the market is being affected by a lack of certainty as high inflation, rising interest rates and dwindling household savings have sapped home-buyer confidence and exacerbated borrowing and affordability constraints.

This has affected both consumer demand for new housing and the cost for land and property developers in obtaining finance for new projects.

From the viewpoint of industry, Keane says this pose a challenge for the market to reconcile the retail price of vacant residential lots in light of both the higher borrowing costs for development on one hand and lower demand for land/new housing on the other.

With this in mind, many land developers will restrict their focus for now to settling past sales and ensuring that land sold in 2021 and 2022 is safely converted into cashflow.

Overall, Keane says land markets will be mostly subdued in 2023.

Generally, 2023 is likely to be defined by two distinct halves,” Keane said.

“The first half of the year will be defined by very low levels of demand and critical issues around affordability and or purchasing capacity. The industry is likely to settle for low sales with very little movement on price. As demand is shallow, offering price discounts will bring about low yields in terms of activity.

“The second half of the year will see the need from both industry and customers to be more active in the market. Industry will need to generate sale volumes, while housing demand will be under pressure to find a home. The market will still be defined by low levels of capacity. This setting may trigger, price discounting, rebates, and incentives alongside a greater inflow of smaller product. It will be a period of intense competition for markets such as Melbourne.

“In summary, 2023 should be a year of low sale volumes and stable pricing. Most markets should experience some downward pressure on pricing by the close of 2023. The degree of price correction will be shaped by the direction lending rates take over the coming 12 months. As it stands further rate rises are expected, which will mean that land prices across select markets may need to move sooner rather than later.”

In terms of specific markets, Keane says Sydney and South-east Queensland may struggle to cater for ‘unmet demand’ which is likely to accrue as market uncertainty leads to unmet housing/land demand that may be sowing the seeds for an eventual further spike in activity.

With demand having been pulled forward, however, markets in Melbourne and Adelaide may be vulnerable as these cities lack a buffer against the current downturn.

Finally, conditions in the Perth market are well balanced.