BIS Shrapnel: Residential recovery continues to strengthen

The upturn in the demand for residential land in Sydney will continue, while the emerging recoveries in the South East Queensland markets of Brisbane, the Gold Coast and Sunshine Coast will gain momentum over 2014/15, according to leading industry analyst and economic forecaster, BIS Shrapnel. But according to the company’s Outlook for Residential Land, 2014 to 2019 report series, lot production in Melbourne and Adelaide is likely to show only more moderate growth, while the market will turn down in Perth. The Sydney residential land market is going from strength to strength, with the sales rate in the outer Sydney growth centres close to early-2000s levels. Despite this rise, the extended downturn in the Sydney land market in the last decade has meant that a significant shortfall of new houses remains. Similarly, the Brisbane, Gold Coast and Sunshine Coast markets have all experienced an extended period of weakness and are seeing a recovery emerge. Low interest rates have improved affordability and also driven an increase in the median house price over 2013/14. With little movement in land prices, new houses and land have become more affordable relative to established houses. This has not only encouraged a greater percentage of home purchasers to opt for a new house over an established one, but also established house owners to sell up and upgrade to a new, larger house. In contrast, demand for land in Melbourne and Adelaide is expected to show moderate growth in 2015 despite the lower interest rate environment. These two markets have experienced a healthy level of new house building and do not have the same level of pent up demand as Sydney and South East Queensland. Consequently, land subdivision is more likely to track underlying demand in the short-to-medium term, with little pressure on land prices. Meanwhile, the fundamentals of the Perth market have begun to turn, with rapidly slowing population growth likely to have a negative impact on demand for land. Senior manager and report series author, Mr Angie Zigomanis, said the strength in the Sydney market is expected to continue, where almost a decade of weakness has meant that not only was there little already-completed lots to satisfy demand, but new subdivisions are quickly emerging to meet the pent up demand. It will take at least a couple of years for this demand to be satisfied. “The signs are also emerging in metropolitan Brisbane, where lot production fell below 5,000 lots in 2012/13; the lowest level in at least 20 years,” said Zigomanis. “However, the emerging upturn in demand has seen around 6,000 new residential lots completed in 2013/14. “Land prices in Brisbane have shown only minimal growth in the past five years. The return of house price growth to the Brisbane market is resulting in an increase in upgrader demand, which should see lot production continue to rise over 2014/15 and 2015/16.” The Gold Coast and Sunshine Coast markets have followed the lead of Brisbane, with a rise in lot production now emerging after being at long-term lows. Arguably, both markets benefit from migration from both Brisbane and the southern states, which rises in periods when solid house price growth is occurring. “Demand for land in both the Melbourne and Adelaide markets is showing some increase, underpinned by low interest rates,” said Zigomanis. “In Melbourne, lot production bottomed out in 2013/14 after the land market was oversupplied due to new subdivisions coming online following the market peaking in 2009/10. As a result, the stock of completed lots had to be progressively sold down before the next round of development could occur. With land demand having picked up in response to rising house prices and low interest rates, any excess has now been largely absorbed and developers are now increasingly selling land in estates off-the-plan, pointing to a sharp uptick in new lot production in 2014/15, with further, more moderate growth expected in 2015/16. “Adelaide experienced mild growth in lot production in 2013/14, with low interest rates and limited price growth improving affordability and encouraging greater demand for land. However, the upside is more limited, with slower population growth expected, resulting in milder growth in demand for new dwellings in general. The market is also being impacted by the removal of the Housing Construction Grant at the end of 2013.” The Perth market has the greatest downside after lot production was at record levels in 2013/14. Record population growth fuelled demand for new dwellings and land. However, with population growth rapidly slowing as employment opportunities wane due to weakening resource sector investment, demand for new dwellings will also decline, with flow-on effects in the land market. One of the key findings of the report series is that the pressure on land prices due to affordability concerns has meant that developers have been producing smaller lots on average. As well as to encourage demand, the increased densities have allowed developers to account for increasing costs at a time when it has been difficult to push up the price point of a block of land. “Median lot sizes have shrunk by between 16 and 28 per cent across the capital cities over the past decade,” said Zigomanis. “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.” Outside of the Perth market, and possibly the Adelaide market, continued low interest rates expected over 2014/15 and into 2015/16 will be conducive to residential demand, with lot production in the other markets rising to a peak in 2015/16. With the exception of possibly Sydney, the peak in lot production is forecast to end up well below their previous peak, as lower net overseas migration inflows contribute to lower underlying demand, and lifestyle and affordability preferences result in greater demand for medium- and high-density dwellings at the expense of new houses. In the medium term, the timing of the next interest rate cycle will be a determinant on the level of growth and length of the market upturn in the residential subdivision markets. Consumer spending and a pickup in business investment outside of the resource sector is expected to add to rising new dwelling construction to drive stronger economic and employment growth. This will be a positive for market sentiment, although the Reserve Bank is likely to be looking to eventually lift rates from their current stimulatory level, with rises forecast from late-2015. The rises will increasingly have a negative impact not only on residential demand, but the economy as well, with residential activity forecast to peak and begin to ease from 2015/16.

BIS Shrapnel: Residential recovery continues to strengthen

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