Australia | Dec 07 2017
Demand for new houses and land across the major centres of population in Australia is likely to start easing, BIS Oxford Economics suggests.
-Greater demand for medium and high-density dwellings at the expense of new houses
-Land prices now catching up with house price growth
-More difficult for developers to maintain margins as construction costs accelerate
By Eva Brocklehurst
Deteriorating housing and land affordability across Australia's major population centres is expected to quell demand for new houses and, consequently, limit the next round of housing lot production.
This is the finding from a report by BIS Oxford Economics, which signals demand for residential land in the major centres of the eastern states should ease into 2018. The research company's Outlook for Residential Land 2017 to 2022 report suggests residential lot production in Sydney, Melbourne and south-east Queensland has peaked. Demand for land in Adelaide and Perth has been weakening and will continue to soften.
Changing lifestyle choices and affordability preferences have also meant greater demand for medium and high-density dwellings at the expense of new houses. New supply in the eastern state population centres has been more pronounced in the units & apartments segment, amid a continued deficiency of detached housing, which is likely to underpin demand going forward.
A downturn in new dwelling supply should mean a deficiency in housing stock re-emerges in most markets eventually. Along with an expected acceleration in economic growth by the turn of the decade this should underpin rising demand for housing through the next cycle.
Meanwhile, new housing demand remains at high levels, with Sydney estimated to have recorded its highest level of residential land production over 2016/17. Lot production in Melbourne peaked in 2014/15 and has remained close to this peak in subsequent years. Brisbane, Gold Coast and Sunshine Coast also experienced a moderate upturn in 2013/14 after an extended period of weakness.
"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," researcher Angie Zigomanis said. "That said, land prices have now largely caught up and this gap will have narrowed, making new housing less attractive."
There's been significant increases in land prices in Melbourne this year which has meant new house affordability has deteriorated. While lot production is likely to remain high into 2018, as recent pre-sales of residential lots are delivered, the resultant weaker demand will cause lot production to fall away from 2018/19, the report suggests.
Meanwhile, Brisbane had an undersupply that reached its nadir in 2012/13, which initiated an upturn that has been supplemented by strength in net interstate migration flows. A further rise is forecast in 2017/18 before significant oversupply in the apartment market in Brisbane plays through to demand for new housing.
The Sunshine Coast and Gold Coast markets have followed the lead of Brisbane. Lot production peaked in 2016/17 as both markets benefited from migration out of Brisbane, Sydney and, to a lesser extent, Melbourne, when affordability became increasingly constrained in those cities.
Lot production Adelaide has been more moderate than in the eastern states. Low interest rates and modest house price growth supported demand but slowing economic conditions and population growth are now weighing on that market.
In Perth the market is now falling after a peak in 2014/15. Western Australia's decline in mining-related investment has caused interstate migration to shift to an escalating outflow and overseas migration has fallen. Consequently, demand for new houses has slumped in Perth and this has affected the land market.
It appears to the writers of the report that median lot sizes have stabilised in most cities over the past 2-3 years. 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 escalate. Affordability will become more challenging and most markets are expected to experience an easing of housing lot production in the next 2-3 years.
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