The Housing Industry Association (HIA) in association with RP Data released the December 2011 quarter Residential Land Report this week and it made for pretty sobering reading. As the report states, over the past five quarters land sales have bounced around the bottom rather than showing any sign of improvement. Over the quarter, residential land sales across the six mainland states fell by 0.8% with 10,479 sales. The level of sales activity over the December quarter was 2.7% lower than over the previous year.
Despite the fact that there was no improvement in sales activity for residential land, values have continued to rise over the quarter. The weighted median residential land price increased by 1.7% over the quarter to $193,171 and across the capital cities, the increase was larger at 2.8% for the quarter.
Across the capital city markets analysed, median prices increased over the December 2011 quarter in each market except for Melbourne where they fell by -1.1%. Across the other capitals the quarterly increases were largest in Adelaide (14.1%) followed by Brisbane (3.9%), Hobart (3.8%), Sydney (3.6%) and Perth (3.1%).
Hobart had the highest median lot size of the capital cities analysed over the quarter at 665m2 while median lot sizes in Adelaide were the lowest at 375m2. Based on the median land price and median land size, vacant land in Sydney is the most expensive on a rate/m2 basis at $533m2, slightly higher than Perth ($527m2). On a rate/m2 basis, Hobart land enjoys a significant discount ($225m2) compared to other capital cities with Brisbane having the second cheapest value at $398m2.
Over the 10 years to December 2011, the rate/m2 on residential land has increased at a significant rate across each capital city. The compound growth rate over the past 10 years is detailed below for each city:
- Sydney – 5.4%pa
- Melbourne – 11.7%pa
- Brisbane – 12.9%pa
- Adelaide – 14.4%pa
- Perth – 13.7%pa
- Hobart – 16.5%pa
Interestingly, if you compare the compound growth rate for land prices over the period to growth in overall house values it appears that the land component is becoming much more expensive while the value of the house is becoming comparatively more affordable. Listed below are the ten year compound growth rates for capital city houses:
- Sydney – 3.9%pa
- Melbourne – 7.3%pa
- Brisbane – 8.3%pa
- Adelaide – 7.9%pa
- Perth – 9.9%pa
- Hobart – 9.7%pa
These figures lend weight to the argument that excessive charges on new development are inflating the cost of purchasing homes, particularly new homes. So too is the limited supply which is highlighted by the fact that although the volume of transactions has collapsed we continue to see an increase in the value of vacant residential land.
Overall, it looks as if the supply side constraints in the new land market are going to persist over 2012. Building approvals data which is available to February 2012 showed that the number of detached houses approved for construction (7,214) was at its lowest level since October 2011 and was -18.2% lower than the 10 year average level. As yet there has been no significant or sustained improvement in these figures, in fact they have been trending lower since the year 2000.
With successive interest rate cuts delivered in November and December of last year and probably more cuts to come over the coming months, we may see some improvement in the volume of transactions in 2012. However, despite the fact that volumes are at such low levels, median prices continue to rise highlighting that the limited supply is leading to increased prices. A supply side response is therefore likely to result in lower levels of growth in values or potentially a reduction in the price of vacant land.
Let me know what you think, what should or could be done to improve the affordability of vacant land?