Some recent studies have shown that land prices have exploded in recent years. This shows us just how far the market has tipped towards shortage, how constipated the whole market is, and why rising prices are just the way of the future.
One of the tricky things with understanding what’s driving property prices is that the price reflects a number of different attributes.
Most importantly in the case of property, prices will reflect the value of the house itself, and the value of the land the house is on.
It’s pretty much impossible to disentangle the two, and most data collectors don’t even try.
This can mean interpreting the data can be a little tricky. If median property prices have gone up in a particular area, is it because the area has become more fashionable, say, and land values have gone up…
Or is it because everyone’s gone renovation crazy and adding extra bathrooms and garages and pools and so on.
The reason why this matters is that the first is driven by market forces. If a suburb becomes more popular, or a new school goes in, and demand goes up, then this will translate into rising prices.
And it’s these market driven increases that offer the best returns to investors.
Renovation driven returns however, aren’t driven by the market, and require investors who are willing to put in the hard yards with refitting a place. There’s money in that route too, but it seems you’ve got to have a bit of a passion for it to make it work.
So there were a couple of reports out recently that allow us to try and get a fix on this.
The first is from the Urban Development Institute of Australia (UDIA). They showed that in just the past decade, there’s been an explosion in land prices across the country:
They reckon the price of vacant lots (which is the best measure we’ve got for land) on a square metre basis, has gone up over 150% over the past ten years.
City by city, it’s a bit less in Sydney. Land prices have gone from $385 to $576 per metre – an increase of 50%, but Sydney had a bit of a jump on the other capitals, and I reckon the expansion in the outer fringes (where land is a bit cheaper) might be keeping a bit of a lid on this figure.
But have a look at the other cities. Perth’s gone from $162 to $547 an increase of 237%! In just ten years. It’s pretty much the same story in Brisbane we’re land values have jumped 230%. In Adelaide they’re up 173%.
RP Data recently released similar research, which showed a similar explosion of vacant lot prices across Australia. 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?
According to the UDIA, the number of lots released to the market has ‘slumped’ in recent years.
And this brings us back round to our usual suspects. Planning regulation, land-release strategies, developer charges and stamp-duties, to name a few.
This constipated market needs an enema.
But there’s no political block willing to drive this. First home buyers have the most to gain, but there’s not that many of them and they’re happily bought out by first home owner grants and so on.
Maybe it’s hush money.
But a lot of other people have an incentive to see the game continue. Existing home owners, banks, builders, real estate agencies, blog-writing shit-stirrers…
No, I just see the writing on the wall. This isn’t going to change anytime soon. Supply’s going to remain constipated, and the market is just going to tip further and further towards shortage…
And prices are going to keep going up.
As much as it might need to, I just can’t see this changing anytime soon.
Tom says
Hey Jon, where do you find the time for all this wonderful research you provide for us?
Property will always be worth what people are prepared to pay for it.
Most cities around the world have been forced upwards, because of land shortages – culminating in Hong Kong style highrise low-cost slums. Here in Oz, with increasing travel times and the cost of providing services to our sprawling traditional quarter acre blocks, lot sizes have been reducing and now the tendency towards higher density housing near railway stations is giving an indication of things to come in the next ten or twenty years. Fortunately, until now, our population has been kept to a moderate rate of expansion, but the looming disaster of climate change flooding all the coastal lowlands around the globe, may cause massive population movements and we will not be able to “Stop the boats”. The WHOLE WORLD will be in turmoil.
In Australia, since day #1, our politicians, have not had the intestinal fortitude to stand up to developers. The urban sprawl has been swallowing up all our best coastal arable land, because it is so much easier to “develop”. Look at Asian village design. The houses are on the higher or rocky land, while the arable land is used for agriculture. Here, we shall be reduced to desert-based hydroponics and aquaculture for all our food, using solar stills for desalination. The arable land will be so highly priced that food production will be uneconomical near the coast. Our family dairy farm, twenty miles from town, was forced to relocate because hobby farmers were forcing up the land values and the Council rates became prohibitive. The whole thing was divided into small holdings and sold off on many titles.
Ignoring the experiences of places like Humpty Doo, the gutless politicians float grandiose ideas about developing the North, instead of putting bans on subdivision of more arable land around the coast. With bans in place, prices of arable land would be set by the productivity of the land itself, rather than what developers believe the market for housing will support. Councils would also have to set rates based on agricultural productivity rather than the potential housing market values.
But I for one am not about to hold my breath on that!!!
Peter says
Hey Jon,
Ever considered running for P.M.???????
Nah,far too honest,informed and pro-active for that !!
Personally,I have 100acres of what I consider to be the best land in Victoria located 3km.from a city centre, within current infastructure and flood proof.
The local Council,in their wisdom,have earmarked the land for much needed Res1, but in the meantime are happy to control the availability/supply of blocks.
Incredibly,they are happy to promote/approve land that is located in or near to designated flood zones.Hope they have access to great lawyers????
In the meantime our land sits vacant, other than 20 cows that are enjoying the fresh air and amazing scenery.
With the proposed trade agreements and thresholds re Chinese investment in Australia,I can envisage another sale to the cashed up Chinese in the near future.
P.S. The said land has the potential to accomodate 500 lots at a VERY
Bjorn Kunzel says
Great article. House prices are fuelled by supply via demand vs the affordability of borrowed money. The cheaper the money, the more demand the more competition the higher the prices. This is the basic formula. I sell property on a daily basis so I’m in the market and I observe the trends. It’s not rocket science. But there is another factor not mentioned here……. The corrupt and bias media…… When Labour were in power they were all over the news and negativity was everywhere but one that the liberals are in power you hear of nothing about Tony Abbot in the media?? Why?? Because the Packers and the Murdochs are friends of this Liberal government and now happy to promote positivity. It’s very very basic… The media say “the market is screwed” people listen people stop buying. The media say “there is a housing boom” and everyone panics and rushes out to buy and upsize resulting in a boom due to competition. This is how it works. So what creates a property boom??
answer. The media perception relayed to the public coupled with cheap money and supply vs demand.
Are we in a real boom now? The answer is NO WE ARE NOT!
The boom has been fabricated but is happening. However be careful, the world monetary system is a complete scam, the Americans are heading towards a depression and collapse the likes this world has never seen. GFC part 2 is coming and it’s going to be 100 times worse. Why? Because the money being lent is not real. The money the whole world owes to whoever it owes it to never existed in the first place. The system as we know it will crash within the next 5 years and there are 3 American families that run the federal reserve that we all have to thank for this. You see government is not run by the people for the people any more. Government is bought by multinationals with money, so now we have a system where money rules all, but the money isn’t real to begin with.
Yes the market is booming nicely right now and will do until the next crash comes and trust me it will come, so enjoy while you can but buyer beware.