RESIDENTIAL LAND IN SYDNEY HITS ALL-TIME HIGH
DEMAND OUTWEIGHING SUPPLY
The high cost of new residential land is at the heart of Australia’s housing affordability crisis, the country’s peak housing body has stated.
Commenting on the latest HIA-CoreLogic Residential Land Report, Shane Garrett, senior economist with the Housing Industry Association said: “Residential land prices hit another new high during the September 2017 quarter as supply struggles to keep pace with demand.”
During the September 2017 quarter, the median vacant residential land lot price rose nationally by 6.5 per cent to reach $267,368.
“Yet again, the price of residential land in Sydney and Melbourne has touched fresh all-time highs,” Mr Garrett said. “Transactions on the land market continue to drop, indicating that supply is simply not matching demand sufficiently.
“The housing industry’s ability to ramp up the supply of new dwellings as demand dictates is hampered by the inconsistency of the land supply pipeline. The time it takes for land to be made available to builders is unnecessarily long.”
According to Eliza Owen, CoreLogic’s Commercial Research Analyst: “The 6.5 per cent acceleration in vacant residential land prices suggests strong demand, even in the context of our largest residential markets passing peak growth rates for the current cycle. The CoreLogic Hedonic Home value index is showing a 1 per cent quarterly decline in capital city dwellings in the three months to January, led by the Sydney market which saw a 2.5 per cent decline,” she said.
“Despite the softening in capital growth, land prices were driven higher by long term confidence in some Australian metropolitan markets. Indeed, developers may act countercyclically to secure vacant land on the fringe of metropolitan areas before the next upswing.”
While the HIA is forecasting a 25 per cent decline in new dwelling starts, it will still leave home building activity in Australia busier than the peak of the last cycle. The HIA has also predicted Australia’s biggest housing construction boom would trough in 2020 at a level of 174,880 new dwelling commencements, which compares with the 2016 total of 233,890. But that would still be higher than the last peak of 172,550 in 2010.
“In another time, that would be a devastating blow to the industry,” said HIA principal economist Tim Reardon. “At this point in time, that would still leave us building more houses than we were building at the previous peak. It’s hard to look down on that.”
RENOVATIONS ON THE RISE
The HIA has also forecast that the value of home renovations will jump 5.5 per cent to $34.3 billion by 2020 after hovering at $32.5 billion.
This reflected the growing number of houses needing work after fiscal handouts in the wake of the GFC prompted many people to pull forward renovation work, Mr Reardon said. “We’re just over the symptoms of the GFC in the renovations market. We’d expect that renovations grow 2 per cent to 2.5 per cent per year assuming there weren’t other factors that interfered, such as interest rate rises or a slowdown in the economy.”
Master Builders Australia (MBA) has echoed the HIA’s views but has predicted the boom in the sector will create a $44 billion industry by 2023.
MBA forecasts homeowners to spend a collective $8.8 billion annually for the next five years, up from last year’s decade-high of $8.3 billion.
“It has provided a much-needed lifeline for small building businesses outside of Melbourne and Sydney who have seen the new housing construction side of their businesses struggle in the last few years,” said the MBA’s national manager of economics Matthew Pollock.
Mr Pollock said a fall in new homes being built in Sydney and Melbourne would be transferred to the renovation market while other states would move from a decline to a boom.
After three years of “unprecedented growth” in new home construction, in which more than 200,000 new homes were built annually, renovations will pick up as the pace of new homes slowed, Mr Pollock said.
“Despite the forecast showing a moderation in new dwelling construction, we expect new commencements in 2017-18 to top 195,000 and average around 185,000 thereafter. To keep pace with population growth, we will need to build at least 185,000 new dwellings each year for the next five years,” he said.
WHERE TO FOR INTEREST RATES?
Australia’s economy is set to rebound, which is likely to have a knock-on effect on inflation. Which means at some point interest rates will start to move up, as is already happening in some other countries.
That’s the forecast of the Reserve Bank, with the RBA governor Philip Lowe delivering an upbeat overview of the global and Australian economy at a hearing of the House of Representatives economics committee recently.
“It would be an exaggeration to say that animal spirits have fully returned, but the mood has certainly brightened in much of the business community,” Dr Lowe said.
Dr Lowe said he expected property price growth and debt to expand slower than incomes to help defuse a dangerous build up in housing debt. That could result in a hike in the official cash rate.
Rising inflation pressures are expected to figure more prominently in discussions of the global economy than they have for some time, Dr Lowe said. He said he expected the fiscal stimulus by President Trump and a synchronised economic upswing to bring renewed investor focus to inflation pressures.
“Above-trend growth at a time of low unemployment should be expected to see inflation lift, even if that lift is gradual because of factors that are affecting wage and price pressures globally,” he said.
Locally, the infrastructure construction surge in parts of Australia is generating jobs and expanding our economy’s future productive capacity.
Dr Lowe also referred to the cooling property market – impacted by regulatory restraints – noting that prices are starting to ease.
“While the Reserve Bank does not target housing prices or household debt, it would be a good outcome if we now experienced a run of years in which the rate of growth of housing costs and debt did not outstrip growth in our incomes in the way that they did over the past five years,” he said.