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.