Demand for residential land is lifting and will continue to strengthen, according to a new report from a leading industry analyst and economic forecaster.
BIS Shrapnel’s Outlook for Residential Land 2013-2018 report shows that the upturn in lot production in both Sydney and Perth is now well and truly underway, due to a rising underlying dwelling deficiency caused by years of limited new construction.
At the same time, affordability has improved considerably thanks to the combination of the weakness in house and land prices and lower interest rates.
Similar conditions are emerging in Brisbane, although BIS Shrapnel says it is likely to be another twelve months before the dwelling deficiency creates enough pressure and confidence returns after an extended period of weakness in its market.
In contrast, despite the lower interest rate environment, demand for land in 2014 is expected to remain subdued, although growing, in Melbourne and Adelaide.
These two markets experienced the strongest residential rebound after the Global Financial Crisis (GFC), and the consequent combination of high levels of land production and solid land price growth has meant that there is little pressure on the demand for new houses and land.
The report suggests that land subdivision there is more likely to track underlying demand in the short to medium term.
Senior manager and report series author Angie Zigomanis said that the Sydney market is being driven by upgraders, who are showing solid growth in demand, while in Perth a resurgence in first home buyers is also making a contribution.
“The signs are also emerging in outer Brisbane, where fewer than 3,000 lots were estimated to have been produced in 2012/13”, Zigomanis said.
“This is the lowest level for at least the last 20 years and would suggest that any excess of completed lots that may have built up over previous market peaks are likely to be exhausted and pent-up demand exists.”
The Gold Coast and Sunshine Coast markets are expected to follow the lead of Brisbane, with a large component of demand coming from population movement from Brisbane, as well as the southern states.
Zigomanis observed that the weaker markets in lot production in Melbourne and Adelaide reflect activity falling from unsustainable record levels.
“Conversely, the weakness in the other cities was the result of excess supply, weak underlying demand, and constrained affordability after land prices had peaked in earlier years”, he said.
“These issues are now starting to wash through, with the recent declines in interest rates expected to be the trigger for a pickup in demand into 2014.”
One of the key findings of the report series is that developers have been producing smaller lots on average in order to encourage demand, while also increasing densities in order to boost their own revenues.
“Median lot sizes have shrunk by between 14 and 32 per cent across the capital cities over the last decade”, Zigomanis noted.
“Developers have tried to keep headline lot prices lower in order to keep the cost of a new house competitive with the existing stock in the outer fringe suburbs, thereby encouraging demand for land.”
The report concluded that the sustained period of low interest rates expected over 2013/14 and into 2014/15 will also be conducive to residential demand, with lot production rising to a peak in 2015/16.