A shortage of land which is vacant and ready for housing development is driving a surge in land prices and leading to more activity in demolition and rebuilds on existing sites, new data reveals.

Released by Housing Industry Association and CoreLogic, the HIA-CoreLogic Residential Land Report for the March quarter provides updated information on sales activity in 51 housing markets across Australia, including the six state capital cities.

It shows that a deficit of vacant lots has emerged as the supply of land which is ready for development has failed to keep pace with surging demand for detached housing.

(Note: the report refers to March quarter data – the most recent which is available -, and thus does not reflect recent increases in official interest rates.)

The report shows that in the March quarter – the most recent for which data is available – the number of vacant residential lots which were sold plummeted to just under 5,00 – the lowest level of sales on record for more than ten years.

Sales volumes registered ten-year lows in each of the metropolitan areas of Sydney, Melbourne, Brisbane, Perth and Adelaide as well as Regional NSW, Regional Victoria and Regional Queensland.

In Sydney, land sales fell to 398 lots in the March quarter despite not having been below 600 during any other quarter over the last ten years.

In regional NSW, new lot sales fell to 590 despite having been below 1,000 only twice in the past ten years.

Meanwhile, the median price of vacant residential lots rose by 6.4 percent during the March quarter from $318,212 to 338,330 and was up by 19.7 percent over the year to March.

This is being driven by year-on-year increases of 47.6 percent, 43.5 percent, 37.5 percent and 31.7 percent in the metropolitan areas of Hobart, Sydney, Adelaide and Melbourne respectively.

Whilst part of the increase reflects a shift back toward larger lot sizes following COVID, prices across Hobart, Sydney, Melbourne and Adelaide still rose by 34.9 percent, 30.6 percent, 26.3 percent and 12.5 percent on a square meter basis after the impact of bigger lot sizes is stripped out.

The combination of low volumes and surging prices indicates a shortage of available land supply.

Whilst this is likely to constrain greenfield development activity, however, other data shows that builders are finding new opportunities in knock-down and rebuild work on established sites.

Throughout 2021/22, data from the Australian Bureau of Statistics shows that approvals were given to demolish 25,563 detached homes across the nation.

This is up by almost 30 percent compared with 2020/21 and represents the highest level of deconstruction activity since data for demolition approvals commenced in 2016/17.

Approvals were also granted for the destruction of 1,064 multi-unit dwellings – a slight decrease compared with the previous financial year.

With New South Wales and Victoria accounting for just over three quarters of demolition approvals in 2021/22, opportunities in this space are primarily concentrated in those two markets.

When considered as a percentage share of overall building approvals, New South Wales is the most active market with demolitions accounting for around 25 percent of overall detached home approvals in 2021/22.

This is followed by Victoria (around 16 percent) and Queensland, Western Australia, the Northern Territory and the Australian Capital Territory (between ten and fifteen percent).

The market is also dominated by detaches houses, which accounted for 96 percent of demolition approvals in 2021/22.

Largely speaking, the rise in knock down and rebuild activity is being driven by a combination of the recent surge in demand for new housing and the aforementioned scarcity of vacant land.

As the pace at which new land supply is coming online has failed to match new housing demand, a growing number of developers and consumers are instead opting to knock-down and rebuild old homes on existing property.

According to HIA, an additional factor in determining the size of the knock-down and rebuild market involves the number of homes which are in a condition or at an age for which this action may be appropriate.

In particular, surveys of its members suggest that around 60 percent of all knock down and rebuilds occur on houses which are between 35 and 54 years old.

This, HIA said, may help to explain the prevalence of knock-down and rebuild activity in New South Wales, which accounted for 31 percent of new homes approved over the twenty years from 1967/68 to 1986/87 and so likely has a similar percentage of the homes which now sit within the 35–54-year age bracket.

HIA Senior Economist Nick Ward said that growth in the demolition and rebuild market will provide opportunities for builders as land shortages begin to restrict greenfield development from the middle of 2023.

He stresses that the surge in land prices over the year to March was ‘not a normal increase’ but in fact represented the strongest annual price growth rate since 2004.

CoreLogic Economist Kaytlin Ezzy says the rise is land prices is being driven by a shortage of land supply.

With land often taking more than a decade to move through the development pipeline, Ezzy added that any material change in supply is unlikely to occur for some time.

“The scarcity of available residential land continues to be a driving factor across Australian land markets, with land prices surging at a time when the number of lots sold is declining,” Ezzy said.

“While increasing interest rates, rising construction costs and increased uncertainty, particularly across the building industry, has likely smothered some land demand, the surge in land prices suggests that those that want to build are finding it difficult to secure lots.”