More evidence that the cyclical upswing is translating into soaring land prices, and proof that our chronic undersupply is about land, not about builders.
The evidence is growing that Australia has a serious problem with land supply.
As I’ve been saying for a while, a constipated market’s inability to bring enough new supply on-line is one of the key factors driving up prices. Not just in the past six months, but over the long term.
We’re talking about serious shortfalls in supply that have been going on for at least a decade, if not more.
HIA and RP Data have just released some interesting statistics on residential land sales – up to December last year, so it’s a few months behind the curve.
This chart here wraps it up. The green (or is that khaki?) bars are the actual number of sales. The volume of sales peaked in June last year, but in the two quarters since then, has actually fallen.
Think about that for a second, and think about where we’re at in the cycle. The Australian housing market is surging into a cyclical upswing. Prices are rising strongly, real estate agents in Sydney have been practically wetting themselves with excitement, and yet we’re selling less land to build houses on.
In the past 9 months, have interest rates gone up? No. Have the first home builder grants been scrapped? No. Has anything changed that means this isn’t one of the best markets to buy into in a long time?
Nope. Nothing.
Despite the market in full recovery, and everyone getting very hot under the collar, we couldn’t bring new supply to the market.
What you’d expect, is that with prices rising, the price signal would be encouraging builders to start building. But this just isn’t happening for some reason.
So you might say, hang on Jon, maybe they know something we don’t. Maybe they don’t believe in the current recovery. Maybe they expect that it’s all coming to come crashing down on us. Maybe that’s why we’re not selling more land. It’s because there isn’t demand for it.
But have a look at that chart again, and have a look at the median price of vacant land – the red line.
What that shows is that prices are rising. ‘Rising’ is barely the word for it. More like jumping out of its skin. They were up 4.2% in the December quarter alone.
The price of land is following the price of houses – upwards.
And so if we’ve got falling volumes and rising prices, that tells us we’ve got a shortage, and there’s not enough supply to meet demand. Because there’s not enough new supply coming to the market, people are willing to pay more for what there is. Sales volumes go down, but prices go up.
And so this is exactly what we’ve got. There just isn’t enough new land being made available to meet demand and this is pushing the price of vacant land up. This in turn pushes the prices of new homes up, and because it’s a fluid market, this pushes the price of all homes up.
But the lack of new land supply also means there’s a lack of new housing supply. And this means that our market tips further and further towards shortage.
The other thing that happens without enough supply is that lot sizes start shrinking.
According to RP Data, median lot prices nationally have risen by over 400% over the past 20 years:
As lot sizes have shrunk by nearly 30%:
Causing the rate per square metre to explode by a whopping 564% over the past 20 years:
With land prices soaring, it makes it difficult to bring new housing supply to market at a price that suits entry-levels buyers. Which is part of the reason why we’ve got this so-called ‘affordability crisis.’
But that in turn means that new supply just isn’t coming on to the market, which drives prices (both house and land) even higher.
And so the explosion in land prices gives us insight into the supply and demand dynamics in the market.
It is true that the nature of land itself can change. Say, it gets rezoned from agricultural to residential. This can affect the value of the land instantly.
But vacant land as a whole, across an entire city, has to be driven by supply and demand, and it seems to be clear evidence of the under-supply of land.
This is important, because if we were in some sort of bubble, as you keep hearing from time to time, and that bubble was being driven by investors and speculators, then you’d see a spike in the price of existing properties – those investments paying returns.
It only translates into vacant land prices when there aren’t enough homes to house the people who want to live in our cities.
And so we’re back to the big question the Australian property market has to answer – why isn’t supply keeping up with demand?
There’s probably a few answers to this question, but very few practical solutions – in the current political climate.
We’re going to be stuck with a housing shortage (and rising prices) for a long time yet.
Lord Lovatt says
They way I see it, there is no “under-supply” of land, Australia has plenty of land, then a little more. The issue is that Australia has an under-supply of ‘useful’ land.
The Victorian state and the Australian Federal Government need to seriously develope regional centres – why not pump some investment and infrastructure into a place like Seymour that is already on two major freight links and encourage people to move and/or invest there? The status quo of bulging metropolitan boundaries is not the answer.
As was done with TAC, relocate a major government adminstrative department there and see the follow-on effects.
ANNE says
Part of the problem, albeit a small part, is that local council fees. charges and processess are making it very unattractive for homeowners and small investors to subdivide existing large (800m2+) suburban blocks. Overall, local councils seem to be managing their spending poorly, and take the easy way out to plug up their lack of financial management ability, by sticking it into the ratepayers, who lack the financial backing to take them to task. The only way things will change is if a dynamic ratepayers association can be created with an appropriately skilled leader and team…..
ANNE says
Fully agree with Lord Lovatt..
Jenny Kennedy says
Lord Lovatt, what you’ve said makes sense, but there is the small (pun intended 🙂 ) matter of shrinking government and diminishing / closing companies in our economy leading to less, not more, work in regional areas. Did you hear about Telstra and the lack of ADSL lines to Mudgee and that new subdivisions don’t even have the ADSL lines connected!
Another problem is costs to land developers by Councils, which can be prohibitive. These problems are Australia-wide – I have lived in Queensland and now in NSW, working for civil engineers. Council costs are always huge for subdivisions. I understand that the costs to Councils for infrastructure are also huge plus Councils all need to make a profit now, and this doesn’t help in the matter.
The only way I can see to improve the situation is for Governments and companies to relocate and / or open in regional areas rather than closing regional offices etc. Can’t see that happening, can you? The bean counters would have 10 fits!
Greg M. says
The main reason for the under-supply of “useful” land is that the crown isn’t releasing it. If they did it would require a whole lot more spending on infrastructure, which they are reluctant to do just now… oh – they have been reluctant to do for the last 5 decades.
Eileen says
In the interests of a balanced argument, the state government has recently announced re-locating a number of government offices to my area of the world, (south west Sydney).
There’s no more (or less) land in Australia……we have what we have.
The fact that the government doesn’t want to release it is another problem. It’s a lot like diamonds………they don’t want to flood the market so the price will fall…………then they get more revenue (the higher the price) and the cost for infrastructure is less….. if the area released is half the size.
Peter Forsyth says
Totally agree with Lord Lovatt.I have owned 100 acres of land located 3km. of Wangaratta’s City Centre that I have been trying get rezoned for the past 10 years. The elevated ,flood free, scenic land is within current infastructure that the Council put in place 9 years ago.Despite the fact that the land is located 200m from a current RUL1/2 Zone, the council have indicated that it needs it for future RES1 ????? In the meantime possibly the best located Vic. Regional land sits idle while the cost of land continues to race ahead. There is NO land shortage rather a shortage of pro-active politicians (don’t get me started on reactive Councils)prepared to make the great Australian Dream a possibility for all.
Wake up to reality : Population to grow by 60 percent in regional Victoria.
Are we ready to accomodate the predicted 2.2 million people who will call country Victoria home by 2051 ???????
Tom says
Tongue in cheek, but serious propositions none the less:-
Governments should encourage the establishment of purpose-designed retirement villages in Rural Towns, where all the services are already provided; where the hospitals are well staffed but under-utilised; where golf courses, bowling greens, tennis courts and Club facilities are of top quality; where land is relatively inexpensive and plentiful; where rail and road transport back to the families living in the Cities is well catered for. Baby Boomers would get good prices for their city homes, freeing these up for young working families, thereby reducing the pressure from land shortages.
Better still, with so much business now done in cyber space, relocate a heap of Federal public servants to regional Tassie, killing SEVERAL birds with one stone.
Just think what it would do for that State’s small businesses and the local youth employment market.
Pressure would be eased back in the big cities where the people had previously lived.
Families would be able to sell their existing homes in those expensive big cities – enabling them to buy or build quality homes in the currently suppressed market, with their own added pressure on local demand helping to force values up, providing extra equity for all home owners.
The cash injection into the local economy would give a fillip to small business and bolster Local and State Government coffers.
The Federal Government would not be spending so much on Social Security payments – instead, it would be receiving increased Taxes of all types, as the local economy revived itself. An improved State economy would reduce the dependence on Canberra. That should please skinny Joe!!!
Unfortunately, I for one will not be holding my breath. Our pollies (Galahs?) cannot see beyond their noses – most of which seem to be in the swill troughs!!!
Rudolf Ruyter says
Hi all.
It is ludicrous that in a country larger than all of Europe and the UK combined, with only 23 million population we claim that there is a shortage of housing land.
The fact is that we are being forced into high density living, as it has been officially stated that we should live like other nations do, and be cramped up into little plots with wall to wall housing.
We have been told that our houses are too big, and that our Australian 1/4 acre plot is too extravagant.
All that is because of the claim that infrastructure can not cope with our expanding suburbs
The target is to make more of us live in little wall to wall boxes occupying less land to make existing infrastructure more useful.
This creates shortages and drives up home & land value and thus more revenue for government (state & local), saves bulk$$$ on new infrastructure investments (for federal, state, & local govt), and condenses/concentrates power and influence by government,
All of which is exactly what the powers to be want….more control over more people in smaller areas for more efficient harvesting of their income, with minimum expenditure to support the population, while reaping more income from the increasing rates, duties, levies & taxes, (and the banks are not innocent in this problem either).
We have a vast continent with more suitable housing land than you could ever imagine.
To claim a housing land shortage is moronic.
The claim should be that any housing land shortage, and the high cost of housing is very calculated, deliberate, and manipulated.
The easiest solution is to generate bulk employment in our agricultural zones by really getting behind major infrastructure projects to provide water to our inland food bowls (which are amongst the worlds biggest), and create a population shift into the country side.
It will take decades, but then we would be creating more wealth for Australia, and more employment.
Then our kids may not need to clean up after us, nor pay for through the nose for our aging/retiring population.
Regards
Rudolf
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Nutbox says
I think you will see that there is a ‘land shortage’…it is not right to say that we have all this available land just sitting there waiting to be developed. Infrastructure that is under the ground is the issue. To bring on that infrastructure by councils and state governments is incredible expensive, especially when those networks are already in many places at capacity. Yes they can do it but the cost would be enormous. Yes you could argue that government fees and charges are expensive (and some are complete bollocks) but sewer and water infrastructure alone is one of the main issues faced by councils and state governments (the capacity on some if those infrastructure networks are just not there) and the end user will be the one paying for it…power is another – networks in many areas are already stretched. Guess we could just triple everyone’s rates and taxes?? But even then – no one could afford to buy…
Infrastructure is not just roads and blocks of land with 4 stakes. Be a little educated before making wild assumptions otherwise you are no different to most journalist…