Surge in land prices will hurt housing affordability

Home buyers will continue to suffer high property prices for some time, with the value of land rising by 2.2% during the 2009 December quarter to a record median price of $185,222, according to a new report.

The HIA-RP Data Residential Land Report reveals the weighted median land price for Australia grew at an annual rate of 14% at the end of 2009 – the fastest pace since 2004 and evidence the market is showing no signs of slowing down.

But in a worrying sign for affordability, the volume of land sales fell in original terms during the quarter by 4.6%, compared to the previous corresponding quarter, indicating a lack of supply. This is a significant drop from the September quarter, when prices were 26% higher compared to the previous quarter in 2008.

Sydney is still the most expensive market for land, with a median price of $275,000, representing price growth of 10% annually. A block in Melbourne sells for $179,000, but volumes have dropped in the city with a 55% decline.

Perth land was the most expensive on a square-metre basis at $521, representing a rise of over 200% since 2002. Sydney land prices came in at $497 per square metres, representing 20% growth since 2002. The biggest gain was in Adelaide, where prices jumped from $147 to $448 during the same period.

Outside capital cities, the Sunshine Coast is the most expensive market with a median price of $249,000, followed by the Gold Coast at $241,000 and Richmond Tweed at $235,000.

Chief economist Harley dale contrasts the national 14% growth rate with the 2.8% price growth for houses, and 1% growth for building materials, during the same period. He says this poses a significant threat to affordability.

“This growth rate is, fair to say, roughly in line with our expectations. We’ve been hearing reports for quite some time that land supply hasn’t been quite there in the volumes to meet significant amounts of demand boosted by low interest rates, and sadly we’re not surprised to see upward pressure on prices.”

“I think it’s all about whether we can contain the rate of growth going forward. It’s quite reasonable to expect that in a rising market, land values are going to go up. But the difference is really when we are seeing 14% annual growth, that’s the rate we need to really moderate.”

HIA economist Matthew King says this issue will become worse until more land is released for development, freeing up supply and putting downward pressure on prices.

“I think we could expect to see prices begin to stabilise when we see an adequate supply of affordable land come to market. Until we see an upward trend in this area, we could expect prices to rise on a national scale.”

However, there are still some areas with affordable land. There are 13 markets across the country with median prices below $100,000, including the northern region of South Australia with $59,165, followed by Mallee in Vitoria at $75,000 and the Southern region of Tasmania at $76,000.

But despite pockets of affordability, Dale says there are still a “range of factors” placing pressure on prices. He says moderation will occur this year as demand drops off due to higher interest rates, and “we would hope by the second half of the year we would see signs we’re not having continued acceleration”.

King said the issue of rising land prices will not only affect first home buyers, but also businesses working in the property sector.

“Certainly home buyers are wrestling with housing affordability at the moment, but this appreciation is also going to hurt developers and businesses in that sector. And of course when they feel price increases, they pass that on the customer.”