On today’s show, Andrew Wilson tells us that right now land prices in Sydney are growing faster than house prices, so hold onto your hat in that market.
Read the transcript here:
Kevin: When we talk about real estate prices, we sometimes forget that it really rides very much on the value of land. It’s interesting to see that there is a report out by Dr. Andrew Wilson, who is the chief economist for The Domain Group, saying that Sydney land prices are now rising faster than houses.
He joins me. Andrew, what do you read into that situation?
Andrew: It really does crystallize that underlying shortage of land in Sydney, Kevin, which is a key catalyst for driving prices over the last decade really and creates that underlying pressure for prices growth that really seems to show no end.
Our latest report shows that Sydney land prices rose by just under 20% over 2014, which was higher than the 14% reported for house prices over the same period. Certainly very scarce on the ground land in Sydney and plenty of demand.
We’ve seen some of those outer Western Hills areas of Sydney prices growth. In Kellyville, for example, up by nearly 40% over 2014. That’s a real extraordinary rise in prices. When we look at the medians out that way. Kellyville has a median land price of nearly $650,000, which by the time you put a house on a block of land with that value, you really don’t get much change out of $1 million.
I think this does reflect that the buyers for vacant blocks of land in Sydney are really coming from changeover buyers who are either looking to change up in their local areas or are moving out from the inner suburbs of Sydney looking for, I guess, that semi-green change type of lifestyle in the outer suburbs.
What this means, of course, is that first time buyers have another competitor in the marketplace. Those entry-level buyers have typically looked, over the generations, for fringe house and land packages as their entry point into the housing market, but now they’re competing with changeover buyers who are pushing prices up very strongly in that Sydney outer fringe.
Kevin: Certainly to say, not good news for first-home buyers. What impact will it have on established homes sales?
Andrew: It’s just offering another variety, another neighborhood characteristic. It means that not everybody wants to live closer to the CDD, not everybody wants an apartment, not everybody wants to live in an established middle ring suburb, that there is still solid demand for new homes in the outer suburban areas from changeover buyers, and they’re prepared to pay money for it.
The real issue in Sydney is there is just a shortage of land. It’s not just about land releases from the authorities; it’s about the geographical constraints – the Blue Mountains to the west, the Pacific Ocean to the east, the Hawkesbury River to the north, the national park to the southeast. It means that land can really only funnel down to the southwest.
That means that new estates are now 70 or 80 Ks from the CDD and it’s difficult to develop. The costs of new infrastructure in those areas is significant and it’s really a problem for Sydney in terms of keeping a cap on what is the strongest prices growth in the country.
Kevin: Just moving out of that Sydney market, what about other cap city markets – Brisbane, Perth, those areas? What’s it like there?
Andrew: We’ve seen strong prices growth in Melbourne and Perth, as well. Those markets – both Melbourne and Perth – are attracting still reasonable numbers of first-home buyers out to the fringe. They have a different geographical profile. Melbourne can spread to the north, to the west, and down to the southeast so it has plenty of broad acre capacity there for new house and land packages.
First-home buyers are still quite active in those areas. That Sydney median land price last year was $319,000 which was clearly the highest of all the capitals. When we look at Melbourne and Brisbane, they were down under $250,000. Perth was up around $300,000.
But that Perth housing market is also supplying a lot of properties for first-home buyers. Perth has the highest proportion of first-home buyer activity of all the capital cities, and a lot of them are buying on the fringe. Some good news there, I guess, for first-home buyers; they’re still competing in the marketplace, but not so much good news with prices rising strongly.
But in the Brisbane market, land prices were up by around 4% last year, which was under that 6% growth that house prices increased by in Brisbane. A lot of that land sales activity was happening to the north of Brisbane, out in that North Lakes area, which is proving very popular with first-home buyers.
I think that shows that that Brisbane house and land package market, particularly directed towards first- home buyers is still resonating and still providing some balance. I think that’s a good news story going forth for first-home buyers looking to get into a new property to start their journey on the property ladder.
Kevin: What about land size? Does that impact this. If you look at square meterage and what we’re paying per square meter in those cap cities, does that vary much?
Andrew: The other thing, of course, Kevin, is that I guess over the years, we’ve seen land sizes fall. The notion of the quarter-acre block really has fallen away. Blocks can vary from as low as 200 square meters in size, but most blocks in capital cities are averaging around 500 to 600 square meters in size. When you start looking at the “bang for the buck” you get per square meter, it can vary considerably.
But overall, I think that there has been a move to more inside living rather than outside living. Whether that’s been a price-driven outcome, people really are moving away from the sense of a backyard. There are lower offsets from the neighbors and also from the frontage offset, and certainly smaller backyards, with people with resident homebuyers looking now more for an internal lifestyle rather than that external lifestyle.
Of course, that suits developers in the sense that they can provide smaller lots and still keep the number of houses supplied at reasonable levels.
Kevin: I think Michael Yardney sums it up nicely. He says, “People are trading backyards for balconies.” That pretty much sums it up, I reckon.
Andrew: That’s right. I suppose that’s all a part of technological change, as well, and more efficient floor plans. This is a positive thing. Also, recreation is now becoming something that is a community-provided recreation rather than something that you provide within your own family group or neighborhood group, in a sense. That, once again, eschews, I guess you’d say, the need for a backyard.
Kevin: Always good talking to you. Dr. Andrew Wilson is chief economist with The Domain Group. You can see Andrew’s blog site and also check out The Wilson Curve at DoctorAndrewWilson.blogspot.com.au.
Andrew, thanks for your time.
Andrew: My pleasure, Kevin.