A recovery in new lot production will begin from 2011/12 across Sydney, south-east Queensland and Perth over 2011/12, while lot production in Melbourne and Adelaide will continue to weaken, according to Economic forecaster BIS Shrapnel.

According to the analysts' Outlook for Residential Land, 2011 to 2016 report series, new house and land activity softened or fell in all major markets in 2010/11, due to the expiry of the First Home Owner’s Grant Boost Scheme, the sharp interest rate rises in 2009/10 (and further rise in November 2010), and slowing economic growth through the year.

However, this decline is creating a rising undersupply in a number of markets, and with an improved interest rate outlook and strengthening economic conditions expected over 2011/12, new house and land activity will begin to recover in those markets where the deficiency will be most pronounced.

Senior project manager and report series author, Angie Zigomanis, says the expiry of the First Home Owner’s Grant Boost Scheme had a significant impact on new lot production during 2010/11 — not only directly through the decline in demand from first-home purchasers themselves, but also indirectly as weaker demand for entry level dwellings prevented upgraders from selling their dwellings to purchase a new house.

“Following the expiry of the Boost Scheme, first-home buyer demand in 2010/11 was around half that of the stimulus-induced peak of calendar 2009, reflecting the pulling forward of demand to take advantage of the incentive,” says Zigomanis.

The report series found that, with the exception of Sydney and Perth — where activity is still modest — all capital city and south-east Queensland markets reported a fall in lot production in 2010/11.

After record lot production in Melbourne and new record levels in Adelaide in 2009/10, any pent up demand pressures have now well and truly eased, and activity is slowing.

Lot production in the south-east Queensland markets of Brisbane, the Gold Coast and Sunshine Coast has collapsed to long term lows, reflecting the underlying oversupply of dwellings across the region.

“However, there is light at the end of the tunnel,” says Zigomanis. “A rising deficiency is developing in a number of markets, while a benign interest rate outlook will see purchaser confidence begin to return, particularly with the flow on effects from rising resource investment forecast to permeate through the rest of the economy from 2012.

“First home buyer demand also appears to have bottomed out, with the ‘pull forward’ effect created by the First Home Owner’s Grant Boost Scheme having been largely worked through. We expect a slow recovery in first-home buyer demand through 2012, which will help to underpin upgrader demand for new houses and land.”

BIS Shrapnel says this should see the residential land market pick up nationally over 2011/12, and accelerate over 2012/13 as economic growth also strengthens. The upturn will be focused in Sydney, Perth and south-east Queensland, which are building new dwellings well below the level required by population growth and where the underlying dwelling deficiency is increasing or, in the case of south-east Queensland, will emerge.

In contrast, new dwelling construction in Melbourne and Adelaide has been at, or close to, record levels, resulting in their dwelling deficiency shrinking, and moving into a possible oversupply. In these markets, lot production will continue to decline from their extremely high levels, although will remain relatively high in a long term sense.

“Pent up demand in those markets where there is a rising deficiency will be supported by a stable interest rate environment as well as rising employment and income growth from a recovery in economic conditions, which will help confidence return to the market through 2011/12,” says Zigomanis. “This will stimulate activity in housing markets and consequently land markets. Nevertheless, new house and land activity will vary nationally, depending on overall affordability in each market, and the level of pent up demand.”

However, BIS Shrapnel warns the environment for new house demand, and therefore the demand for land, will begin to deteriorate over 2013/14 as interest rate rises eventually have an impact across all markets.

They say that gains in employment and income growth up until then will overcome some of the initial rises and will continue to support activity. But as inflationary pressures become more acute as the resource investment boom peaks and creates skills shortages and wages pressure, a sharp tightening in interest rates is expected, taking the standard variable rate to a forecast peak of 8.75 per cent in the first half of 2014. 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 2014/15.