A new report by industry analyst and economic forecaster, BIS Shrapnel, says green shoots have emerged in the demand for residential land in the Sydney, south-east Queensland and Perth markets, with more positive signs to continue through 2012/13.
But according to BIS Shrapnel’s Outlook for Residential Land, 2012 to 2017 report series, lot production in Melbourne and Adelaide is expected remain in the doldrums.
The recent protracted weakness in the Sydney, Perth and Brisbane markets, and to a lesser extent the Gold Coast and Sunshine Coast markets, has created the conditions for an upturn. Low new dwelling construction has resulted in a rising underlying dwelling deficiency, while affordability has improved considerably due to the combination of the weakness in house and land prices and lower interest rates.
In contrast, despite the lower interest rate environment, demand for land in 2013 is expected to remain subdued in Melbourne and Adelaide. These two markets experienced the strongest residential rebound after the Global Financial Crisis (GFC), and the consequent combination of high levels of land production and solid land price growth has meant that there is little pressure on the demand for new houses and land.
Senior manager and report series author, Angie Zigomanis, says that early signs for a recovery have emerged through 2012 with lending activity for new dwellings and to first home buyers on the increase in Western Australia and Queensland. Although the data is being muddied a little in New South Wales by changes to first home buyer incentives, activity there also appears to be trending upwards.
“The rise in loans for new dwellings, although modest so far, suggests that a recovery in demand for new houses and land is beginning to emerge in these states,” said Zigomanis.
“Moreover, the rising first home buyer demand, which itself does not necessarily translate directly to new house demand, will allow up-graders to more easily sell their existing dwelling and purchase a new house.”
The report series found that, with the exception of Sydney, where lot production was flat, and the Gold Coast, where activity remains incredibly weak, all capital city and south-east Queensland markets reported a fall in lot production in 2011/12.
“The declines in lot production in the Melbourne and Adelaide markets reflect activity falling from unsustainable record levels, while the weakness in the other cities were the result of excess supply, weak underlying demand, and constrained affordability after land prices had peaked in earlier years,” said Zigomanis.
“These issues are now starting to wash through, with the recent declines in interest rates expected to be the trigger for a pickup in demand into 2013.
“Conversely, the factors that drove the downturns in the other cities now exist in Melbourne and Adelaide and it will be their turn for demand for land to experience a period of weakness.”
Nevertheless, BIS Shrapnel says that the emerging upturn in Sydney, Perth and South East Queensland will be slow to gain momentum. Concerns about the outlook for the local and world economy, as well as employment prospects, are expected to make potential new house buyers hesitant, with only modest growth in lot production and minimal rises in land prices expected in 2012/13. With the likelihood of continued low interest rates through 2012/13, and evidence that the residential markets are showing growth, a stronger rise in the demand for new houses and land is expected over 2013/14.
Given the weaker fundamentals, lot production in Melbourne and Adelaide is likely to continue to fall, with the possibility of further declines in prices, and/or increases in buyer incentives also occurring.
In the medium term, the timing of the next interest rate cycle will influence the level of growth and length of the market upturn in the residential subdivision markets. The forecast recovery in residential building nationally is expected to take over as the main driver of the Australian economy as resource investment begins to wane, and the continued economic growth will be conducive to residential demand, with lot production rising to a peak in 2014/15.
However, current land price levels mean that some new home purchases will remain out of the house/land market, opting for smaller, and more affordable, attached dwellings instead. As a result, lot production is forecast to end up well below its previous peak in Sydney and south-east Queensland and on par with the previous peak in Perth. By this time the Reserve Bank is expected to become increasingly concerned about inflation and begin to adopt a tightening stance. The consequent rises in the cash rate are forecast to take the standard variable rate to 8.1 per cent by 2015. This will have a negative impact not only on residential demand, but the economy as well, with residential activity forecast to enter a downturn over 2015/16.
Outlook for lot production by region
Sydney
The Sydney residential land market collapsed in the middle of the decade when land prices doubled over a three year period and made the cost of new houses uncompetitive relative to the existing housing stock. However, falls in land prices through to 2008/09 and a pickup in outer Sydney house prices in 2009/10 have improved the equation for the purchase of new houses relative to the established stock.
“Lot production has improved from a record low of 1,400 lots in 2008/09 to 4,200 lots in 2011/12,” said Zigomanis.
“Nevertheless, new dwelling construction remains well below that required by population growth, evidenced by tight vacancy rates and solid rental growth.”
As a result, low interest rates and the improved affordability for new houses are expected to continue to encourage further growth in the demand for land in Sydney. However, land affordability is not expected to improve to the levels of the start of the 2000s, when lot production peaked at 9,000 lots per annum. Lot production is consequently forecast to peak at a lower 7,000 lots by 2014/15, with the shift to less expensive medium and high-density dwellings, and infill and knockdown development in established areas being maintained.
Perth
Lot production in outer Perth has collapsed since peaking in 2005/06. While house prices boomed and became unaffordable during this period, land prices rose by an even greater amount, making new housing even less affordable. The rise in prices also drove speculative land purchases, which took the land market into oversupply.
As a result, there has been a substantial and extended downturn in the Perth residential land market. At its lowest point, lot production fell to around half its peak level and median land prices now are still estimated to be nearly 10 per cent below their peak five years ago. Without growth in land prices, developers have been resorting to smaller lots to increase lot densities in order to cover increases in development costs.
“The smaller lot sizes have allowed developers to maintain affordability by keeping headline land prices lower,” said Zigomanis.
“The combination of lower land prices, income growth, and lower interest rates has meant that the purchase of new houses has improved to its most affordable level since the early part of the mid-decade boom.”
Together with the improved land affordability, population growth in Perth has been accelerating, resulting in a rapidly rising underlying deficiency of dwellings, as evidenced by tightening vacancy rates. These factors will result in growth in house prices and new dwelling demand in Perth, translating into a rising demand for land.
Lot production in Perth (including Mandurah) is consequently forecast to rise and peak at 13,600 lots in 2014/15 – around the same level as the 2005/06 peak – as population growth in Perth finds its way into the new dwelling market.
Brisbane
New house activity and lot production in Brisbane is well below its most recent peak levels over 2007 and 2008. The peak in prices and new dwelling activity resulted in a market that had become unaffordable and oversupplied, particularly after population growth weakened considerably in line with the downturn in the Queensland economy.
“Apart from a brief rally in 2009/10 driven by sharp cuts to interest rates and increased first home buyer incentives, new housing starts and lot construction have continued to fall into 2011/12,” said Zigomanis.
“In fact, lot production in outer Brisbane in 2011/12 fell to its lowest level since 2000/01.”
However, BIS Shrapnel says positive signs are beginning to emerge for the Brisbane land market. First home buyer loans in Queensland were up by 28 per cent in 2011/12, which should provide increased demand for entry level properties to allow upgraders to purchase larger new houses. Net overseas and interstate migration into Queensland has also improved in 2011/12 after bottoming out in 2010/11. Affordability has also improved considerably since 2009/10 after declines in prices and reductions in interest rates.
This improvement in the fundamentals will be augmented by accelerating growth in the Queensland economy. While there has perhaps been a short term hit to confidence as a result of recent public sector redundancies, the magnitude of LNG investment still to run suggests that employment growth will continue to be solid in the next one to two years.
Modest growth in lot production is anticipated in 2012/13 before accelerating in 2013/14. Confidence is expected to steadily improve as there is increasing evidence that the Brisbane market is improving. However, forecast rises in interest rates over 2014/15 will begin to curtail the upturn before it can gain too much momentum, with lot production in outer Brisbane forecast to rise to a peak of 6,100 lots in 2013/14; still below the peak in lot production in 2007/08.
Gold Coast
Demand for land on the Gold Coast has collapsed after a peak of 3,500 lots was recorded in 2006/07. Just over 1,000 lots were produced on the Gold Coast in 2010/11, which is the lowest level of lot production on the Gold Coast for at least the past 20 years, and despite rising to 1,200 lots in 2011/12, remains at long-term lows.
Interstate migration also plays a key part in the demand for new dwellings on the Gold Coast, and net interstate migration into Queensland fell to its lowest level in 2010/11 in more than 30 years, impacting on the demand for new dwellings. This was compounded by an excess dwelling supply that emerged when lot production peaked, as well as a rise in prices that reduced the region’s affordability advantage over the eastern state capitals. Moreover, some Gold Coast developers have been unable to proceed with development due to lingering financial constraints after the Global Financial Crisis, while the inability to raise land prices has meant that the insertion of infrastructure charges has affected the viability of developments that were bought at the peak of the market, and has stopped production of some subdivisions.
“We expect any upturn in the Gold Coast market to be relatively slow,” says Zigomanis. “The market is still working through the issues of oversupply, while local economic conditions remain weak. Two of the main economic drivers of the Gold Coast are tourism and construction and it will be some time before these two sectors can contribute substantially to employment growth.”
Nevertheless, the very low level of new dwelling activity is resulting in excess stock being absorbed, leading to a rising deficiency eventually emerging and a pick up in lot production gaining momentum as the state economy continues to improve, rising to a forecast peak of 2,800 lots in 2014/15. While this is more than double current levels, it is well below the peak of 2006/07. The recent price declines on the Gold Coast have seen affordability improve, but it remains an issue and a forecast peak in interest rates in 2015 will cut off any upturn before it can fully play out.
Sunshine Coast
Sunshine Coast lot production is estimated to have fallen to below 1,000 lots in 2011/12, below the peak of 2,300 lots in 2007/08 – which in turn was well below the previous high of 3,700 lots in 2003/04. Migration onto the Sunshine Coast is a key component of demand for new houses, in particular empty nesters aged 55 and over who sell their existing homes and embark on a sea change. However, substantial price growth in the first half of the decade has meant that the trade down value of the region has been somewhat reduced, and the upturn and peak in lot production was well below that in the middle of the decade.
The downturn since 2007/08 has largely been due to weaker purchaser demand resulting from reduced interstate migration. However, it has also been exacerbated by depressed local economic conditions, funding constraints for development since the GFC, and additional stock being added to the market via the sale of holiday home dwellings for occupation, or the return of holiday homes to the residential rental market as owners seek to obtain a return from their underutilised dwellings.
The upturn in lot production in the Sunshine Coast market is expected to be slow, rising modestly in 2012/13, before stronger growth in the subsequent two years. Growth will be supported by a pickup in internal and interstate migration as improvement in the Queensland economy is expected to underpin greater residential turnover in Brisbane, while the residential upturn in Sydney is also expected to gain momentum. This will again encourage empty nesters to sell up and migrate to the Sunshine Coast. Lot production is forecast to peak at 2,100 lots in 2014/15, similar to the levels in 2007/08 – although still well below previous peaks.
Melbourne
Residential land production in Melbourne peaked at a record of almost 19,000 lots in 2009/10, underpinned by rapid population growth, an underlying dwelling deficiency, increased first home buyer incentives and low interest rates.
“However, strong growth in land prices during the upturn caused new house/land packages to become less affordable relative to the existing housing stock,” says Zigomanis. “At the macro level, the high level of new dwelling construction in Melbourne has also eroded the dwelling deficiency.”
As a result, lot production has been easing since 2009/10, falling to an estimated 14,900 lots in 2011/12. With Melbourne’s underlying dwelling deficiency moving into an excess, there is little upward pressure on new dwelling demand, despite recent cuts to interest rates. Demand for new dwellings will also be softer than in recent years as forecast weaker economic conditions relative to the other states mean that Victoria will attract a lower share of overseas migration, as well as see the emergence of a net outflow of population to the other states.
As a result, lot production is forecast to continue to weaken over the next few years, bottoming out at 10,500 lots by 2015/16. Land prices will also remain under pressure given their deterioration relative to house prices, with incentives expected to continue to be a feature of land sales prices.
Adelaide
Lot production in Adelaide was sustained at a relatively high level immediately after the GFC, underpinned by increased first home buyer incentives and lower interest rates. Lot production in outer Adelaide averaged around 3,500 lots per annum over 2008/09 and 2009/10 after averaging less than 3,000 lots per annum for much of the decade. This period of strong activity has resulted in a mild excess of dwellings emerging in Adelaide, and together with the weaker economic environment over the last two years, lot production has fallen to an estimated 2,200 lots in 2011/12.
The reductions in interest rates in 2011/12 should maintain lot production at this lower level through to 2014/15. The subdued environment over the next few years is also expected to result in flat land prices. The forecast lower level of lot construction translates to new supply running just below the estimated level of underlying demand, and by the time interest rates enter another easing cycle towards the end of the five year forecast period, an emerging underlying dwelling deficiency will create the conditions for a solid subsequent upturn.
