Prices for vacant residential land have stabilised across Australia as rising interest rates have slowed demand for new housing, new data shows.
Releasing the latest quarterly edition of their quarterly HIA-CoreLogic Residential Land Report, Housing Industry Association and CoreLogic have provided updated information on prices, sales volumes and lot sizes for vacant residential land across 51 housing markets including the six state capitals.
On a national basis, the report reveals that median prices for vacant residential lots declined by a modest 0.2 percent in the September quarter to end the quarter at $328,954.
This represents the second quarter in which prices have stabilised following a previous surge (see chart) that occurred as low interest rates and incentives such as the Commonwealth HomeBuilder program drove record levels of demand for new home building in detached house markets.
The apparent stabilisation in overall lot prices, however, disguises a significant fall in land values which has occurred on a square meter basis.
On a square meter basis, land values fell by 5.4 percent in the September quarter and are down by 7.7 percent over the past two quarters.
This has been offset by an increase in median lot sizes from around 370 sqm in the September quarter in 2021 to almost 430 sqm in the September quarter of 2022.
Meanwhile, the volume of land sold fell to new record lows of 4,405 lots during the September quarter.
This is the third quarter in a row that land sales volumes have broken through record lows.
Prior to 2022, the previous record low in residential land sales (6,789 lots) was recorded more than 30 years earlier in March 1991 at the height of Australia’s last pre-pandemic recession.
The decline follows a previous surge in land sales volumes which occurred during the aforementioned boom in detached home building.
The latest data comes amid ongoing evidence of a slowdown in new home building activity.
This has seen the number of loans which are provided to owner occupiers to finance either the purchase or construction of new homes fall to its lowest level in almost ten years and building approvals contract for five of the past six months.
The slowdown has been driven by an aggressive cycle of monetary policy tightening by the Reserve Bank of Australia, which has increased official interest rates eight times from 0.1 percent to 3.1 percent since last April.
Housing Industry Association Senior Economist Tom David welcomed the stabilisation in land prices.
Devitt cautioned, however, that the price declines do not signal an end to land shortages but instead reflect deteriorating confidence and borrowing capacity resulting from the interest rate hikes.
This is obscuring an underlying land shortage that will further exacerbate affordability challenges when demand returns.
“The stabilisation of the price of new residential land is a relief following a 26 per cent increase in less than two years …” Devitt said.
“… This stabilisation of new residential land prices and falling sales volumes do not reflect an end to underlying shortages of land. Rather, they reflect a combination of worsening affordability and the shock of the RBA’s rate hiking cycle to consumer confidence and borrowing capacity.
“Declining prices, together with record low sales volumes, are disguising the underlying shortage of land in the short term.
“Sales volumes started plummeting two years ago when land prices were soaring. This is strongly indicative of a shortage of shovel ready land in the face of strong demand.
“The recent price declines have also coincided with the steepest rate hiking cycle in a generation.
“A recovery in demand depends largely on the RBA’s future cash rate decisions. Once demand recovers, the underlying shortage of shovel ready land will further exacerbate the affordability challenges already facing aspiring homeowners and renters.
“Lower land prices and more affordable housing must be driven by a greater supply of land, shorter delivery times and fewer regulatory and tax imposts, not by the destruction of confidence.”
CoreLogic Economist Kaytlin Essy said that the decline in land sales volumes was not surprising in light of the record volumes of land sold during HomeBuilder.
Ezzy added that further declines are likely as the full impact of rate hikes flows through.
“Given that much of the available land supply was consumed over the September Quarter and December Quarter 2020, when the HomeBuilder scheme increased demand for land, it’s unsurprising that land sales have continued to trend downwards to new record lows,” Ezzy said.
“Similar declines have been seen through a number of construction metrics, including dwelling approvals, which have trended 10 per cent below the decade average for the past six months, and dwelling commencements, which are tracking 32.4 per cent below the peak recorded in June 2021.”
“While a 0.2 per cent decline over the September Quarter 2022 is fairly mild, we would expect the price falls to accelerate in the coming months. Australia’s residential land market typically follows the established dwelling market, which fell by 4.1 per cent over the three months to September. Additional rate hikes, coupled with continually high construction costs, will add additional downward pressure on prices, with steeper declines expected in the December Quarter 2022, and into 2023.”
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