The cost of vacant residential land in Australia has risen by more than fivefold since the beginning of the century, new data shows.

And prices continue to rise as the recovery in new home building activity is leading to a shortage of land which is ready to be sold to the market for new housing development.

The Housing Industry Association and Cotality have released the September quarter edition of their HIA-Cotality Residential Land Report, which provides updated information on prices and sales volumes across 52 land markets including the six capital cities.

The report focuses on ‘greenfield’ land markets which lie predominately on urban fringes.

It highlights two points:

• In the immediate term, prices continue to rise as an upturn in new housing starts places pressure on the supply of ‘shovel ready’ land.
• Over the longer term, a more than fivefold increase in land prices over the past twenty-five years has played an enormous role in driving up the cost of new housing delivery (see below).

In terms of the first point, the report indicates that the national median lot price for vacant residential land that was sold across Australia increased by 3.9 percent in the September quarter and by 10.3 percent over the year to September to come in at a new record high of $391,420.

Stripping out the effect of an increase in the average size of lots which have been sold, prices on a square meter basis still rose by 0.8 percent during the quarter and by 6.9 percent over the year to September.

Concerningly, the rise in prices is occurring as the number of lots which have been sold remains at subdued levels (see chart).

The combination of higher prices and low volumes typically indicates that levels of supply are constrained.

Predominately speaking, price pressures are concentrated in capital city markets.

On a weighted average basis, median lot values across the greater metropolitan areas of the six state capitals increased by 6.1 percent during the quarter and by 12.6 percent for the year to reach $437,865.

On a square meter basis, capital city prices were up 8.6 percent year-on-year.

By contrast, median lot prices in regional markets edged down by 2.1 percent during the quarter and were up by a more modest 3.2 percent over the year to September at $295,160.

In terms of individual cities, the price surge has been concentrated in Adelaide, Perth and Brisbane.

Over the year to September, median lot prices across these cities increased by 38.1 percent, 34.9 percent and 22.8 percent respectively.

This is not surprising as the recovery in new housing construction has been focused around these three capitals.

Supply pressures are showing. In Brisbane, the number of lots that were sold almost reached a record low during the quarter; in Perth, volumes sank to their lowest level in a quarter of a century.

Meanwhile, there are signs that land markets are beginning to pick up in Victoria and New South Wales – albeit with prices remaining flat in Sydney.

This is not surprising amid growing signs that the recovery in new home building is now spreading to these two states.

In Melbourne, signs of upward pricing pressure are reemerging, with prices up by 3.4 percent during the quarter and by 5.8 percent for the year. This has occurred on the back of strengthening sales volumes over the past year – an indication that demand for land is picking up.

In Sydney, sales volumes have lifted from their recent trough. However, prices remain broadly flat thus far.

Land shortages may constrain new housing recovery

The latest data comes as residential the supply of land has come under greater pressure on account of the strengthening recovery in new home building activity.

The recovery has been underway for the past two years after the number of dwelling commencements reached a trough in September 2023 as interest rates reached their peak.

Initially, the recovery was focused on the low-density, detached house segment of the market and was concentrated in Queensland, Western Australia and South Australia.

This has created significant demand for land in greenfield areas as land demand is largely driven by development activity in the detached house segment of the market.

The latest data serves to reinforce concerns that the ability to deliver new affordable housing in greenfield areas will be constrained by the cost and availability of land that is ready to be sold for new residential development.

This includes land which is zoned for residential development, is serviced and is connected to infrastructure such as roads, water, sewerage, drainage, electricity, open space and community facilities.

Of particular concern is that land shortages appear to be emerging even as the level of new housing development remains well below that which is required to achieve the National Housing Target of delivering 1.2 million new homes over the five years from 1 July 2024.

To achieve this target, Australia would need to deliver an average of 60,000 new dwellings per quarter across the five-year period.

Even with the recent improvement in construction starts, however, the nation commenced only 48,778 new dwellings (seasonally adjusted) in the September quarter.

Should land shortages not be addressed, the nation will need to rely upon urban infill and multi-residential construction to reach the national housing goals.

Land shortages a massive housing bottleneck over 25 decades

In addition to the current market situation, the latest report highlights how land shortages and price rises have been a significant bottleneck in new housing delivery over decades.

Over the twenty-five years from September 2000 until September last year, median lot prices of vacant residential land in greenfield areas increased by more than fivefold (513.6 percent).

On a square meter basis (which takes out the effect of a modest decline in block sizes over the past 25 years), prices have risen more than sixfold.

Over that same period, costs associated with the process of physically constructing new homes (labour, materials, equipment etc.) have risen by only 161 percent.

This means that as far as greenfield housing is concerned, land price rises have been the most significant factor in driving up the cost of new home delivery.

Within their report, HIA and Cotality highlight a growing trend over recent decades to shift the cost of infrastructure provision (for roads, sewage etc.) away from governments and onto developers. This, the report argues, eventually flows through to the price which consumers pay for new homes.

Such a transfer occurs though a charges such as developer contributions, infrastructure levies, headworks charges, utility connection fees, and a range of state and local government taxes.

Whilst the report does not dispute the need for the development industry to make an equitable contribution to support infrastructure which enables new housing development, it says that in many cases, these charges go well beyond the efficient cost of providing infrastructure.

It also argues that some charges reflect gold plating of standards, lack of competition in infrastructure provision and lengthy planning and approval processes that add time and financing costs.

It calls for the development of a fairer and more equitable model for infrastructure funding.

Commenting on the report, HIA Chief Economist Tim Reardon said that more action is needed to address land supply and affordability constraints.

“Over the last 25 years, the price of the typical new residential lot of land has risen more than three times faster than construction costs,” Reardon said.

“Since 2000, residential land prices have increased by more than 500 per cent. Over the same period, construction costs and the price of skilled labour increased by around 150%. The long-run escalation in housing costs has been driven overwhelmingly by land.

“The way governments release, service and tax land has embedded the cost of infrastructure, delays and planning decisions into land prices. Those costs are paid upfront, capitalised into land values and ultimately borne by new home buyers …

“… It was easy over the last few years to lose sight of what has been the most pressing constraint on Australian home building – everything has appeared to be under pressure since the pandemic.

“The shortage of shovel-ready land is central to solving the affordability challenge.

“Without a healthy pipeline of shovel-ready land across Australia’s capitals and regions, along with all the associated infrastructure, fairly funded, the return of demand for new housing will be diverted into the established housing market, further driving up prices and worsening the affordability crisis.”

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