The price of vacant residential land rose at the fastest quarterly pace seen in fifteen years during the first three months of 2021 as buyers scrambled to secure lots in order to capitalise on the Commonwealth HomeBuilder program, the latest data shows.

Published by Housing Industry Association (HIA) in conjunction with CoreLogic, the Residential Land Report shows that median land prices rose by 4.7 percent during the March quarter.

This represents the highest quarterly rate of increase since 2006.

The growth in prices occurred as the volume of lots sold slumped by 31.2 percent to be 42.5 percent lower than its peak during the September quarter last year.

Leading the way was Perth, where lot values surged by 12.5 percent in the quarter.

This was followed by Hobart (11.6 percent), Sydney (5.4 percent) and Melbourne (4.7 percent).

On the flip side, prices fell 3.5 percent in Brisbane and remained stable in Adelaide.

Year-on-year, prices are up 12.8 percent, 12.6 percent, 11.3 percent and 6.6 percent in Sydney, Perth, Hobart and Melbourne but have contracted by 9.3 percent in Brisbane and by 1.5 percent in Adelaide.

Partly speaking, the latest increase in prices reflects momentum in residential development which was seen during the latter part of last year due to Homebuilder (due to technical issues, there is a lag between when sales are registered and when price changes are reflected in the report’s data).

Nevertheless, both HIA and CoreLogic say that the combination of declining volumes and rising prices is indicative of underlying supply constraints.

“The decline in sales represents a shortage of available land as other leading indicators, including HIA’s New Home Sales Report, show there continues to be a significant number of new homes entering the construction pipeline,” HIA Economist Angela Lillicrap said.

“In the three months since the end of HomeBuilder, new home sales have returned to levels consistent with 2018, a relatively strong year for detached building.

“The surge in demand for residential land due to HomeBuilder saw developers bring forward as much shovel ready land as possible. This somewhat kept a lid on prices during the short timeframe of the program but the impact of inadequate land supply can now be seen in the March quarter prices.”

CoreLogic Head of Research Tim Lawless agrees – cautioning that current pressures are unlikely to ease in the near term.

“Rising prices against a backdrop of lower volume is generally an indication of demand outweighing supply; an unsurprising trend given the success of HomeBuilder in incentivising new housing construction activity,” he said.

“The surge in detached housing approvals to record highs has seen demand for residential land increase substantially and it will probably take several years for the pipeline of approved houses to work through to completion.

“In the meantime, land prices could rise further. Additionally, the scarcity of labour and building materials is likely to place additional upwards pressure on construction costs, adding to affordability pressures in the housing sector.”

Beyond the immediate picture, the report highlights longer-term challenges on land availability and affordability.

Over the ten years to March, median lot prices in Sydney and Melbourne and Hobart have risen from $280,000 to $485,000, from $210,000 to $335,000 and from $135,000 to $204,750 respectively. Prices have increased more modestly in other capitals.

Partly because of this – and also because of a desire from developers to maximise yield – new housing blocks are getting smaller.

Over the past ten years, median lot sizes across Sydney, Melbourne Brisbane and Perth have fallen from 510sqm, 460 sqm, 574 sqm and 459 sqm to 399 sqm, 408 sqm, 450 sqm and 380 sqm.

Were it not for that, land costs would have increased further.

On a square meter basis, land values over the past ten years have more than doubled from in Sydney (from $571 per sqm in March 2011 to $1,276 per sqm in March 2021) and have almost doubled in Melbourne (from $468 per sqm to $830 per sqm).

The contraction in lot sizes, meanwhile, may have broader social and environmental impacts as rear yard spaces and spaces for vegetation on private lots become more constrained.

Outside major capitals, the report indicates that the most expensive land markets on a median lot price basis are Richmond – Tweed in New South Wales, the Mornington Peninsula in Victoria and Illawarra in New South Wales.

Median lot prices in these regions amount to $517,500, $493, 750 and $400,000 respectively.

The most affordable markets are West and North West Tasmania (median price $86,000), Western Australia – Outback (South) ($90,000) and Outback South Australia ($93,500).