What do these challenges mean for land prices?
The residential vacant lot market is fraught with challenges brought about by the same macro-economic factors across Australia, and Herron Todd White is urging all potential buyers of vacant land to do their due diligence to make sure they can fund the construction project.
In HTW’s Month in Review for August 2023, Kevin Brogan (pictured above), national director of group risk and compliance, noted that despite the pause in the cash rate adjustments by the Reserve Bank, following 12 hikes, inflation remained well about the target rate with further cash rates not fully out of the table yet – which meant higher mortgage repayments for anyone needing to borrow money to buy a property.
And that’s just one of the many challenges purchasers of vacant land face.
“Construction costs have increased well above CPI, so once you have purchased the land to build your dream home, you need to find a builder who can construct it at a reasonable cost and in a reasonable timeframe,” Brogan said. “You will also need to live somewhere during construction and for many this means renting a home at a time when most markets are seeing significant rent increases.
“If you already own a home, your mortgage repayments will have been increasing. And then we are back to where we started – even though the rate of inflation is coming down, consumer prices are still going up and the general cost of living continues to present its own challenges.”
So, what does this all mean for the residential vacant land market and, in particular, land prices? To answer this question, one must understand the diversity of residential property markets in Australia as well as the resilience of those markets.
Land in master-planned large subdivisions, for instance, is more likely to be impacted by cost pressures.
“By their very nature, these subdivisions create a significant supply of residential blocks,” Brogan said. “Where these subdivisions are designed to increase the availability of housing at the lower end of the price scale, potential purchasers are more likely to be borrowing near the limit of their ability to service the loan and may be more affected by cost constraints. This can impact the volume of land sales and prices.”
One example of that is a 546-square-metre site in Rosemeadow, in Sydney, which sold for $640,000 in January 2022 then fetched $580,000 in a resale in April.
In established suburbs, demand for vacant residential land is still enough to offset cost pressures, because of the comparatively restricted supply of such sites.
“One such example is a 200-square-metre block in Richmond (inner Melbourne) that sold for $1.34 million in February,” Brogan said.
In rural living areas, which continued to attract residents from COVID until now due to the lifestyle benefits of working from home, the downward pressure on residential land prices has been offset in many areas by supply shortages.
“In many such areas the supply of vacant land with a dwelling entitlement is fixed – the zoning will not allow for the creation of more lots by subdivision,” Brogan said. “When such a residential block comes on the market, it is often sought after by many potential buyers whose competitive bidding results in short marketing periods and firm prices.
“All of this is affecting buyer behaviour and some buyers are weighing up the costs and uncertainty of building and making the safer choice to purchase an established dwelling. Other buyers are purchasing land and waiting to build later, in the hope that construction costs will eventually fall.”
Whatever potential buyers choose to do, the HTW leader has one piece of advice for them: “Thoroughly research the market and building costs to make sure they can fund the construction project.”
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