Market Segments – Why land will continue to surge

A development specialist writing an article about not waiting to buy might sound a bit rich, but hear us out. We aren’t putting on a sales pitch here. We let the statistics do the talking.

I’ve been a property development specialist for the better part of the last ten years. Over this time, I hear the same statement used time and time again.

“The market is bound to drop.”

“I’m waiting for prices to lower.”

“Everything is overvalued.”

There’s a lot to unpack in these statements for a single blog piece. On the topic of value, the intrinsic worth of a property or land to the market is what someone is willing to pay, but we’ll gloss over that for the time being.

There is a cautionary tale here. I remember a purchaser looking in the market around 2013. Castle Hill. Prices were too high. I next came across him in North Kellyville. Same thing. Waiting for the drop. Then Box Hill, Riverstone. The cycle continues. I am relatively certain he still never purchased, and the values he was looking at remain consistent, along with his belief that the market was just bound to tank any day.

A lot is made in the media about the valuation of property. Interest rates, affordability, the availability of credit, and the disproportionate ratio of income/credit which is growing.

At the end of the day, it boils down to simple economics. Supply and demand. The UDIA predicted in their State of the Land last year that property demand will far outstrip supply. Despite COVID-19, and likely strengthened by Australia’s stronger than expected economic recovery in most sectors, demand has surged. Supply however, lags behind.

There are a lot of factors and variables that determine supply. Bureaucracy and red tape is an impediment (Section 7.11 contribution changes have played a huge part), along with raw land values of developable land sites in greenfield areas also plays a part. But the ultimate point here is that supply is not keeping up.

The Australian Financial Review op-ed today (11th March 2021) reflects on the property market post COVID-19 lockdown and both Mirvac and Stockland spokespeople report having to bring forward supply to meet the demand. Lend Lease conversely, stated they did not have the lots ready to sell and therefore were unable to enjoy the upswing.

This paints a stark picture for housing affordability. Stockland Research (provided to the AFR) crunched the numbers on the supply and demand drivers in the detached housing markets.

Supply and Demand Outlook for Detached Housing
Source: Australian Financial Review

The above chart, notes a number of core interesting points, note this reflects the detached housing sector, and the apartment supply numbers are irrelevant when comparing the state of supply v demand in the greenfield housing (detached) sector.

An important distinction to note, as highlighted by the orange net balance of supply and demand drivers, is that Sydney’s greenfield sector was already inherently undersupplied. Market drivers over the past few years, surging demand pre-2019 drove the charts into negative. The upswing in supply over 2020-2021 will not do enough to tip the scales back into balance, with the research indicating again surging demand through 2022-2025. By 2025, the net balance will be in deficit by around -80,000 dwellings. This is a significant number, and even with some variables, legislative changes, this is unlikely to shift by more than 20,000.

Development Lag and Approvals

One item we touched on earlier is Red Tape. We will likely explore the effects of S7.11 contributions in a later entry, however the supply with respect to greenfield areas, which affect the aforementioned data from Stockland Research paints a better picture of why supply is being outrun by demand.

Some core facts about property development need to be laid out to understand this point. Developers will buy raw land a x year, however in terms of bringing the lot to market, it will be x+2 by the time it reaches the point of being part of the supply equation. The drop in supply across 2020-2021 reflects market changes in 2018-19, and as you would have deduced, around the time of the market slow down after the large bull market.

This is poignant, as this lag due to approvals and red tape piece together more of the puzzle. Between 2013-2018, we conducted monthly trawls of Development Approvals in most greenfield councils. As a ballpark, we’d find 15-20 new subdivisions going through for example the Hills Shire Council.

This morning, at the time of writing, when we conducted the same search parameters, we found one new development approval for residential subdivision (excluding engineering certificates and subdivision certificates, residue and single lot subdivisions). This is a stark contrast. From (assuming an average of 38 lots per subdivision, some are higher naturally), a drop from 570-760 new lots per month, to 38.

Simple maths showcases the factors at play that are lowering supply and multiplying demand. We have witnessed this drop for the past two years, so since 2019, development approvals are dropping, less new stock is coming to market, and the existing home market alone is not enough to counterbalance the scales of historic built up demand from migration (which is factored into the Stockland Research).

The Up Shot

You are of course, always welcome to form your own opinions on the market. But the numbers and statistics paint a bleak picture for those expecting or desiring the property market to drop. 30 years ago, economists and speculators were saying the exact same things, and providing the exact same reasons for $600,000 being the upper limit of Sydney property values.

Sydney is a global city, and COVID-19 notwithstanding, continues to grow albeit at a slower rate. But the slowdown is not enough to cause a significant drop in the market. History tells us this trend is consistent. Forward modelling data showcases that it won’t change anytime soon.

You’re always more than welcome to wait, make sure your financial situation is sufficient to make a move on a property in this market. But always remember, the history and data is a reminder of a cautionary tale.

Written by Dave Mills
March 11, 2021
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