In the battle to improve housing affordability, Australia has a problem

A housing estate encroaches onto rural land on the outskirts of Melbourne. Photo: William West/AFP/Getty Images

In its battle against housing affordability, Australia has a problem.

Well, an even bigger problem.

The cost of vacant residential land is soaring, especially in the nation’s southeastern capitals where housing affordability concerns are the most acute.

As this chart from the latest HIA-CoreLogic Residential Land Report reveals, the cost of a vacant lot jumped by a further 2.1% in the first three months of this year, leaving it at $253,525, the highest level on record.

Source: HIA

A couple of things stand out immediately.

The first is the rapid growth in prices.

According to the report, they grew by 9.8% across Australia’s capital cities over the past year, led by mammoth increases of 16.6% and 11.1% in Melbourne and Sydney respectively.

Coincidentally, those capitals have seen the fastest growth in house prices over the past year, driven by strong population growth and record-low interest rates.

The second feature of the chart is that the number of lot sales — shown in green — are not increasing by any significant degree. Indeed, if anything, they’re trending lower.

It’s little little wonder why lot prices are at record highs.

Shane Garrett, senior economist at the HIA, summed up the current housing affording conundrum perfectly.

“Land price increases in Australia are unrelenting,” he said following the release of today’s report.

“The solution to the housing affordability challenge lies in ensuring that the additional residential land needed across our cities and regional towns is delivered in the right place, at the right time and at the lowest price.

“This should be a key imperative for governments at all levels,” he added.

And given what’s been seen in Sydney and Melbourne over the past year, policymakers in those centres will have their hands full in delivering cheap land supply.

Not only are vacant lot prices in these cities the highest and third-highest across the nation at $450,000 and $260,000 respectively — with Perth sandwiched in between at $262,000 — but they are also increasing rapidly.

And, as seen in the charts below, the number of lots being transacted in both cities are not increasing, but falling.

Here’s price growth and lot sales in Sydney over since the GFC.

Source: HIA

And here’s the same chart, but only for Melbourne.

Source: HIA

Both charts are troubling.

According to Census data released by the ABS, an average of 1,859 people per week moved to Melbourne over the past five years, while Sydney’s population increased by 1,656 per week over the same period.

In state-wide terms, Victoria’s population grew by 147,000, and by 116,400 in New South Wales, during the year.

That strong population growth, coupled at a time when land supply is dwindling, helps explain why housing affordability is continuing to worsen in these cities.

It also helps explain why there’s been such an influx of high rise residential development over the past few years, with high land costs creating the incentive to build up not out.

While increased apartment supply is helping to curb price pressures, it does raise questions as to whether it’s adding suitable housing stock for what households truly desire, especially for younger families.

This final chart shows the cost of vacant residential land by square metre across Australia’s capitals, comparing where they sit today to one decade earlier.

Source: HIA

NOW WATCH: Money & Markets videos

Want to read a more in-depth view on the trends influencing Australian business and the global economy? BI / Research is designed to help executives and industry leaders understand the major challenges and opportunities for industry, technology, strategy and the economy in the future. Sign up for free at