Soaring land prices are a sickening sign that housing affordability in Australia is unlikely to improve

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When it comes to buying a home in Australia, nothing matters more than the cost of land.

Forget the fees and charges associated with a purchase, let alone the actual dwelling itself, it’s the land the home sits on that largely determines what it’s worth.

And that applies to both new and established housing, regardless of where its located.

In an era when housing affordability, or more precisely housing market accessibility, continues to dominate the headlines in Australia, policymakers continue to roll out measures to help improve the chances of first-time buyers entering the market.

Stamp duty concessions, higher grants — they’ve all be rolled out in different states and territories over recent years to deal with what many now deem to be a crisis.

However, for all those attempts to improve housing affordability, there’s just one tiny problem.

Residential land prices — the largest component in determining a properties value — are not going backwards or steadying but skyrocketing, nullifying any other measures to help improve affordability.

Just take a look at this chart below from the latest Australian Housing Industry Association (HIA)-CoreLogic Residential Land Report released earlier today for evidence as to just how fast prices are rising.

Source: CoreLogic

According to the report, the median lot price nationally rose to $256,683 in the June quarter, an increase of 8.5% on a year earlier.

And, even with the number of lot sales jumping by 13.1% over the quarter, total sales were still down 8.7% on the same period a year earlier.

So sales fell and prices jumped, an understandable outcome given Australias’ population is currently growing at the fastest pace in years, and well above historic norms.

For government’s attempting to solve housing affordability, it’s not an ideal situation.

The largest cost in purchasing a property — the land — is increasing at a significantly faster than incomes or inflation.

Making matters worse, land costs in Sydney and Melbourne — Australia’s largest and most expensive housing markets where housing affordability concerns are the most acute — are rising at a far greater rate than the national average.

In Sydney, the median residential lot sold for $470,000 in the June quarter, the highest level on record and up a mammoth 9.8% on 12 months earlier.

Breaking down that figure further, land in Sydney now costs $1,051 per square metre.

And, as the chart below shows, coinciding with the rapid increase in land costs in Sydney since the start of 2012, the number of lot sales remain significantly lower than what was the case only a few years ago.

It’s little wonder why land prices are continuing to increase at a rapid clip.

Source: HIA

It was a similar story for land prices in Melbourne over the past year. However, in comparison to those looking to buy in Sydney, the news was even worse.

According to the report, prices jumped by 7.8% over the quarter to $275,000, leaving the increase on a year earlier at 19.6%.

Twenty percent.

And that quarterly increase came despite a lift in lot sales of 26.1% over the quarter.

However, as seen in the chart below, that rebound only retraced just some of the declines reported in the previous three quarters. From a year earlier, they were still down 18.5%.

Source: HIA

The subsequent lift in land prices helps to partially explain why house prices in both of these cities grew by over 10% over the year, according to separate data from CoreLogic.

Demand for housing is strong thanks in part to population increase and record-low interest rates. However, at the same time, supply of land remains 10% below the same period a year ago.

Outside of Australia’s two largest capitals, the median lot price in Perth, Brisbane, Adelaide and Hobart stood at $262,500, $239,500, $215,000 and $135,495 respectively during the quarter. From a year earlier, that was up 8% in Adelaide, 5% in Perth and 0.1% in Brisbane.

Only Hobart, a significantly smaller market than Australia’s other state capitals, recorded a decline in land costs over the year at 15.8%. With dwelling prices in Hobart currently growing at the fastest pace of any capital city, that result is likely to be the exception, rather than the norm, in the period ahead.

This chart shows the change in land values per square meter by individual state capital, comparing the level now to that of a decade earlier.

Source: HIA

With land prices rising sharply across the country as sales volumes decline, the HIA said the June quarter report does not augur well for housing affordability over the near future.

“The speed at which land price is increasing is a concern as it compounds the housing affordability problem,” said Shane Garrett, HIA Senior Economist.

“Land supply policy has to be central to making real and sustainable progress on housing affordability. This requires improved outcomes with respect to financing of housing infrastructure, monitoring and timely reporting on land release and speeding up zoning and subdivision process.”

Without progress on those fronts, one could argue there’s also a need to look at the drivers of housing demand, in particular population growth.

It should come as little surprise that Melbourne and Sydney, Australia’s fastest growing capital cities, are seeing land costs consistently increase faster than the national average.

According to the ABS, Victoria’s population grew by 149,400, or 2.4%, in the 12 months to March this year, outpacing New South Wales where the population increased by 123,300, or 1.6%.

Based on data from Australia’s Census, an average of 1,859 people per week moved to Melbourne in the five years to 2016, 200 more than than Sydney which averaged 1,656 per week over the same period.

The inflow of people to these two capitals is clearly impacting housing affordability.

Given the laws of supply and demand, something has to give if land affordability is to improve.

Either supply needs to increase or demand needs to slow, or a combination of both.

Until that happens, little is likely to improve, with or without extra incentives being offered to prospective buyers.

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