Contributed by Luke Kelly and Christian Ranieri
The great Australian dream is changing. With prices for house and land packages in Melbourne’s growth corridors increasingly out of reach for many first home buyers amid housing affordability concerns, there is growing market demand for medium density options including townhouses in greenfield estates.
This changing development landscape in Melbourne’s greenfield market brings significant opportunities for developers, driven by a maturing buyer mindset about the type of dwelling they live in.
Favourable economic conditions including low interest rates and strong population and employment growth has underscored continuing high purchaser demand and escalating prices in the greenfield market.
Monthly sales data for Melbourne’s growth corridors revealed November 2017 recorded 1,713 lot sales, which remained above the long-term average, but was 12 per cent lower than November 2016 due to developers withholding lots from the market as title timeframes extended out to 15 to 18 months on the majority of estates
The western corridor continued to dominate sales activity, with Melton recording a share of 32 per cent and Wyndham 23 per cent. The northern corridor accounted for 26 per cent of total lot sales, with sales volumes in Hume three times that of Whittlesea. The median land price continued to increase by 27 per cent at $302,100 compared to the same month last year.
[Related reading: Developer Embraces 3D Tech for $100m Greenfield Development]
With these price increases many developers are broadening their product mix in all growth corridors amid housing affordability concerns among first home buyers in particular. Historically the dominant product has been conventional housing which was a detached house and land package. The introduction of the Small Lot Housing Code (SLHC) in 2011 was a game changer in terms of releasing to market higher percentages of detached housing under 300 square metres without the need for an individual planning permit, as was the case previously.
This still met desired configurations including a double garage, three bedrooms, two bathrooms and a small backyard.
Over the last 12 months’ prices have continued to climb. The sub-300 square metre land price, for example, has risen 28 per cent from approximately $175,000 to $225,000. Developers have had to consider offering even smaller lots to meet the demand of budget conscious buyers not prepared to compromise on the double garage, three bedrooms, two-bathroom configuration.
This composition often translates into a narrower block with reduced width and the garage at the back of the house, and can reduce the block size from 260 square metres down to 150 square metres.
The evolution of medium density product in the greenfields is a growing trend the market is beginning to embrace.
This is backed by 2016 Census data which revealed a 117 per cent increase in semi-detached, terrace or townhouse product in the growth corridors in the last five years.
It also enables developers to utilise the land better, and control the built form solution so that a high-quality product is being offered to the market, which is critical not just from a buyer perspective but also to maintain the aesthetic integrity of the estate.
A well-designed master plan with product diversity also drives higher rates per square metre and allows developers to cater to a broader mix of buyers, which is critical to reaching and maintaining strong sales velocity. Broadly speaking, there is currently approximately five to 10 per cent of medium density throughout greenfield estates in the growth corridors, which is anticipated to continue to rise.
There are numerous constraints developers need to take into account when determining product mix, such as fall of land, proximity to existing and future amenity, location near parkland and open spaces, and transport links.
The most important consideration is ensuring developers are putting the right product at the right price to the right market. To this end, there is currently an “education” underway among prospective buyers regarding townhouse living in the greenfields.
For example, up until approximately four years ago, first home buyers could buy a house and land package in a growth corridor such as Craigieburn for approximately $350,000. With prices now sitting at more than $500,000, increasingly this cohort is being priced out of the detached home market. However, if they can see that future amenity is coming, and can purchase a townhouse incorporating the configuration they want at a price point they can afford, they are willing to adapt their thinking towards medium density living.
Another important consideration for developers is the ability to de-risk their project. If they’re bringing to fruition a development in a market similar to current conditions, and they produce conventional lots only in a particular corridor, they will reach a ceiling that they cannot go beyond and therefore may not be able to achieve sales velocity.
Traditionally, medium density within the greenfield space was a challenge to successfully deliver as there was a ceiling set by the price of a traditional house and land package. However, the growth of land prices and in turn house and land package prices, has created the opportunity to successfully start implementing this product to market.
As an example, a developer recently divested a super-lot within his estate in Cranbourne North. He subdivided part of the lot to deliver medium density including 41 double-story townhouses on 150 square metre lots, achieving in excess of $1,000 per square metre for the land. The balance of the land is up for public tender as a potential development site with child care/commercial uses.
Victoria is a prosperous place where people want to come to live and work, hence it is expected robust demand will continue out in the greenfields throughout 2018 and beyond. Net migration alone to Melbourne is currently 102,000 per annum, and, paired with the natural population increase of more than 36,000 people suggests an immediate need for more than 37,000 homes.
The market is being exposed to a potential new norm of over 20,000 lot releases per annum, but it will likely reach a ceiling of some sort on price growth. The fact remains that on most states the average household income is $90,000, with a buying capacity of around $500,000. In order to maintain first home buyer demand with a lower household income, providing a diversity of product at the lower end of the price range is imperative.
There is also an expectation that average lot sizes will continue to decrease, whereby the current median of 400 square metres could potentially fall to around 350 square metres in the short to medium term. Based on the current median lot size, last year saw a 26 per cent increase on the price per square metre following a 17 per cent increase the year prior.
A continuing challenge, however, is that infrastructure, amenity and services also need to be delivered. As the correlating graph shows, if there was no new release of stock, available lots in the Melbourne growth corridors would plateau to only 20 trading days of supply based on current sales levels (four months of supply has traditionally been the norm).
It is critical that there is appropriate government policy to deliver land supply, and productive relationships between state and local governments to address the timing delays from a planning perspective.
For the development community, it’s about responding to under supply in a responsible way; which means delivering a diversity of good quality product to ensure a strong outcome for both developers and buyers.
Luke Kelly is head of Communities and Christian Ranieri is head of Transactions & Advisory at RPM Real Estate Group.
The Urban Developer will occasionally publish opinion pieces written by outside contributors representing a wide range of viewpoints.