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Demand for Residential Land Expected to Fall After Peak Cycle

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Residential lot production in Sydney, Melbourne and South-East Queensland has been recorded to be around its peak in the 2017-2018 cycle and will begin to fall away as Australia experiences increasing headwinds in the housing market.

BIS Oxford Economics senior manager Angie Zigomanis, who authored the company’s Outlook for Residential Land 2017 to 2022 report series, said that the forecast downturns in the eastern state centres were likely to be moderate.

New supply in these markets has been more pronounced in the apartment sector, with markets continuing to experience a deficiency of detached house stock that is likely to continue to underpin demand.

[Related reading: Australian Construction Climbs Again in November]

Nonetheless, new housing demand has still risen to high levels. Sydney was estimated to have recorded its highest level of residential land production over 2016-17. Lot production in Melbourne peaked in 2014-15 but has remained close to this peak in the subsequent two years.

GoldCoast

Similarly, the Brisbane, Gold Coast and Sunshine Coast markets have been experiencing a moderate upturn since 2013-14 after an extended period of weakness.

“Steady price growth in houses in the initial stages of the housing construction upturn improved land price affordability and shifted some demand from the established house market, to the new house and land market,” Zigomanis said.

“This 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 to the strength of the eastern state capitals, the Adelaide land market softened considerably in line with weak population growth and a subdued local economy. Lot production in 2016-17 was well below its peak and there are few key economic drivers on the horizon. Meanwhile, the Perth market continued to struggle both in absorbing the declines in mining investment and in broadening its economic base.

“Most markets saw house price growth outpace land price growth through the early stages of the upturn, which improved the value proposition for a new house," Zigomanis said.

“That said, land prices have now largely caught up and this gap will have narrowed, making new housing less attractive.”

The BIS Oxford Economics forecasts for land availability:

Forecast for land availability

[Related reading: Melbourne's Apartment Market Forecast Not So Bleak]

Land production in Sydney was estimated at 11,300 lots in 2016-17 – its highest level in the past 25 years. Meanwhile, the house and land price growth through the upturn saw affordability diminish, as evidenced by rising net outflows of population from Sydney. This is expected to see lot production begin to ease back from 2017-18.

Record population growth has been the main driver of demand for new houses and land in Melbourne, while in Brisbane, a further rise was forecast in 2017-18, before significant oversupply in the Brisbane apartment market plays through to demand for new housing.

An expected softening in house price growth over 2017-18 and 2018-19 is expected to play through to land prices, which in turn will make it more difficult for developers to maintain margins as construction costs continue to escalate.

Together with recent solid rises in land prices making affordability more challenging, and strong construction alleviating some of the undersupply pressures, most markets are expected to experience an easing in lot production in the next two-to-three years.

The downturn in new dwelling supply will eventually see a rising deficiency re-emerge in most markets. Together with an expected acceleration in economic growth by the turn of the decade, this will underpin rising demand through the next cycle.

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Article originally posted at: https://https://theurbandeveloper.com/articles/demand-for-residential-land-expected-to-fall-after-peak-cycle