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?
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.