- The cost of vacant residential land in many parts of Australia is soaring, especially in Melbourne.
- Lot sales are tumbling. Along with falling home prices, this is starting to have an impact on new residential investment.
- Land costs make up the vast bulk of housing prices in most instances.
While home prices in many of Australia’s capital cities are now falling, the cost of vacant residential land is not.
Especially in Melbourne.
According to the latest Housing Industry Association’s (HIA) Residential Land Report, produced in conjunction with CoreLogic, the median price for vacant lots jumped by 7.4% during the March quarter of this year, leaving the increase on a year earlier at a mammoth 15%.
Contributing to the sharp increase, the HIA estimates the number of lot sales nationally fell by 4.5% over the quarter, and by 28.4% over the year.
It’s little wonder prices continued to push higher, especially in Melbourne.
The report found the median lot price in Australia’s fastest growing capital city surged by 12.9% in the first three months of the year, leaving the increase over the past 12 months at a staggering 40.8%.
Yes, that’s not a typo.
The median-priced lot in the city now costs $359,000, the second-highest level in Australia behind Sydney. Just five years ago, prices were just above the $200,000.
The steep increase in Melbourne prices has coincided with a large decline in total lot sales over the same period, as seen in the chart above.
Outside of Melbourne, the scale of price increases were more modest — including in Sydney — despite declining levels of sales in all capital cities.
The median price in Sydney rose 3.9% over the quarter, the same increase seen over the past year. That was despite a steep drop in lot sales over this period.
It now sits at $467,500, more than double the level seen in most other capital cities.
In Australia’s smaller capital city markets, median prices over the quarter rose by 5.2% in Brisbane, 2.3% in Adelaide, 5.8% in Perth and 8.8% in Hobart.
From a year earlier, prices rose in all markets except for Brisbane, ranging from 10.4% in Perth to 2.3% in Adelaide. Brisbane price fell 1.2% over the year.
This table from the HIA shows the change in lot prices by capital city per square metre, eliminating the effect of lot sales of differing sizes.
As seen in the chart below, the median lot price has increased in all capital cities over the past decade, especially in Sydney and Melbourne.
And here a similar chart, only showing the cost in per metre terms.
With prices increasing over this period, rapidly in some instances, the median lot size has also fallen across every capital city.
So prices are rising, lot sizes are getting smaller and sales volumes are depressed across the country.
As Shane Garrett, HIA Senior Economist, explains, that’s not a great mix for helping to improve housing affordability.
“As the single largest ingredient of every new home, land prices have major implications for affordability,” he says.
“It is important that governments work towards delivering the land we need to house Australia’s growing population over the long term.
“Home ownership will become even harder to grasp if sufficient volumes of residential land are not delivered year on year in a manner that the market can keep track of.”
Eliza Owen, Commercial Research Analyst at CoreLogic, says the combination of higher land costs and falling home prices is already starting to have an impact on new residential building, a scenario that is unlikely to help housing affordability in the longer-term.
“While high frequency CoreLogic indices data is showing the capital city housing markets moving into a downswing, the residential land sales data show a continued trend of subdued transaction numbers against price increases,” she says.
“CoreLogic is finding fewer new development applications for residential projects added to the pipeline across Australia… [with] the number observed in the March quarter down 6% to 1,412.”
With Australia’s population increasing by 388,000 in 2017, including growth of 143,400 in Victoria and 116,800 in New South Wales, the combination of more people and less residential development is unlikely to help improve affordability should current trends persist.
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