The market for vacant residential land across Australia is experiencing sluggish conditions as rising interest rates have led to a slowdown in detached house construction, new data shows.
Releasing the latest edition of their HIA-CoreLogic Residential Land Report, Housing Industry Association and CoreLogic said that the number of vacant residential lots that were sold across the nation remained flat during the March quarter at levels which are lower than those seen at any other time in at least five years (see chart).
At this level, sales were 37.2 percent lower compared with the March quarter last year and amounted to just over half of the number of lots sold ten years earlier in the March quarter of 2013.
The decline in sales has been consistent across both urban and regional areas. All up, 36 of the 51 areas covered by the report experienced lower sales volumes compared to the March quarter of 2022.
And prices have stabilised following a surge that occurred during the recent boom in detached homebuilding – though there is concern that prices are still rising despite the low level of demand which is implied with current sales volumes.
All up, the median price of vacant residential lots increased by 0.6 percent over the March quarter and has risen by 1.9 percent over the past twelve months.
With median lot sizes across capital cities having increased by 1.4 percent over the quarter, this means that land prices fell during the quarter on a square meter basis.
That said, the current median price of vacant residential lots remains 22.5 percent above its levels three years ago in the March quarter of 2020.
By comparison, median prices increased by only 5.1 percent in the three years prior to that.
Moreover, the recent stabilisation in prices obscures a longer-term trend of rising land values within major metropolitan areas.
Over the ten years to March 2023, median lot prices across the Greater Metropolitan Areas of Sydney, Melbourne and Hobart have risen from $285,000, $201,000 and $124,000 to $664,000, $411,000 and $307,500 respectively.
This has occurred even as the average size of vacant residential lots which are sold has contracted.
When combined with rising costs for materials and labour, this has served to further exacerbate challenges associated with delivering new housing at affordable prices.
The latest data comes as conditions in the market for detached house construction continue to contract following an unprecedented boom which occurred during Commonwealth Homebuilder program.
In particular, activity has slowed since the Reserve Bank of Australia began its aggressive program of interest rate rises in May last year.
As a result, building approvals in detached housing have been trending down and are now near their lowest level in a decade.
With land sales typically being a forward indication of detached house commencements six to nine months in advance, the data indicates commencement numbers are likely to remain subdued during the remainder of the year and into 2024.
Housing Industry Association Senior Economist Tom Devitt said that the low volume of sales signals further challenges in the market for detached home construction.
Meanwhile, Devitt expressed concern that current market conditions may be obscuring an underlying shortage of shovel-ready land that will see prices rise again once demand returns.
Such a shortage is evident in that fact that prices are still rising despite the low sales volumes, he said.
He encouraged governments to ensure that the pipeline of land which is at various stages of development is sufficient to meet long-term housing requirements.
“The volume of residential land transactions has fallen 37 per cent over the 12 months to March 2023,” Devitt said
“This will see the volume of new home commencements slow over the next year.
“An acute shortage of available land saw the price increase by 23 per cent over the three years from March 2020 to March 2023. This compares to just a 5 per cent increase in the three years before that.
“This land shortage continues to drive up prices despite the sharpest increase in interest rates in over 30 years and will weigh on home building activity in the coming years.
“As the market begins to normalise from the shocks in recent years, it is expected that both sales and prices will return to their historical trend. This depends on the government’s ability to adequately plan its land release pipeline, which in turn depends on the availability of data across all stages of land release.
“On average, it takes ten years to move land through the seven stages of land release.
“Decisions made today about land release can be expected to affect housing supply ten years from now.
“The time it takes to progress from a vacant block of land to a block that is shovel-ready with titles could be a major roadblock to the government’s plan to build a million homes over the next five years”
CoreLogic economist Kaytlin Ezzy said that the resilience of land prices reflects a shortage of supply that emerged during the boom in detached house construction.
Essy said that any notable recovery in supply levels is unlikely to occur for some time.
“Although the rate tightening cycle has seen some capitals record mild declines in recent months, land prices overall have remained fairly resilient, thanks to the shortfall in available land supply,” Ezzy said.
“While sales numbers have eased significantly from the peak volumes seen during the HomeBuilder scheme, it will take some time before we see a more notable recovery in supply levels.
“Until then, we can expect land prices will remain elevated, dwelling approvals will continue to track below average, and house commencements will continue easing.”
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