HIA and CoreLogic RP Data recently released the latest update to their Residential Land Report, which showed some relief from the tight conditions that had been afflicting the market in previous quarters.
Amid a strong increase in vacant residential land sales, the pace of increase in prices eased off during the June quarter this year. This follows the deteriorating situation of sharp price increases against declining sales volumes, reflecting a classic demand-supply imbalance that had been escalating since late 2013.
Developments in the residential land market, as captured by the HIA and CoreLogic RP Data report, are instructive for actual bricks and mortar activity, particularly in the detached house segment of residential construction. Typically, a lot will be sold prior to the construction of a house, so land sales activity provides a good indication on the prospects for detached house building activity.
To that end, it was encouraging to see an increase in land sales in the June 2015 quarter in five out of the six states, with Western Australia the only state to have experienced a reduction in land transaction volumes during the quarter (down by 1.4 per cent). The strongest increases in sales activity occurred in the smaller states, namely South Australia and Tasmania, which were up by 44.2 per cent and 40.1 per cent respectively. In New South Wales, land sales increased by 21 per cent during the quarter, while in Victoria and Queensland the quarterly increases were 19.7 per cent and 18.4 per cent respectively.
However, one quarterly increase in land sales activity – which still leaves levels lower than they were 12 months earlier – doesn’t translate into a renewed round of growth. The overall profile of activity is consistent with our expectations that the detached house segment of residential construction will slowly ease off from most recent levels over our (three-year) forecast horizon.
Land market activity has also played a very specific role in the dynamics behind the current phase of the new home building cycle and can shed further light on the outlook.
The starting point to the new home building outlook is a very strong one. The ABS recently released data on dwelling commencements, showing what new residential dwellings were started during the full 2014/15 financial year.
Total starts reached a new record high of nearly 212,000 homes during the year, some 17.5 per cent higher than the level in the 2013/14 financial year. The strength in residential construction was largely driven by the multi-unit segment of the market, with starts for these types of dwellings jumping by 27.8 per cent to reach an all-time high of 95,917. Detached house starts increased more modestly over the year, up by 8.7 per cent to reach 113,920 – a decade high, but a level that falls short of the record of 132,376 starts, which occurred back in 1988/89.
The situation in the land market is quite instructive of this outcome. Aside from the latest quarterly update to residential land sales and prices, the broader land market situation suggests that demand for new residential land has outstripped the supply that has come online for nearly two years now. This has represented a key capacity constraint on the detached house building market and is likely to play a key role in how the broader new home building cycle evolves.
New detached house building activity reached something of a ceiling in 2014, remaining at around 28,000 commencements per quarter since then. During this time, the non-detached house segment of residential construction has been the key driver of overall growth to the record highs we’re currently experiencing. Commencements in this segment increased from a level below 20,000 per quarter to reach around 25,000 per quarter more recently. Accordingly, we expect this segment of the market will be pivotal on the way down – the extent of the declines in multi-unit dwelling construction will likely be the key driver in an aggregate reduction.