When we talk about the escalation in home values over the recent past a major factor that is often overlooked is that most of the increase has been driven by the escalation in vacant land costs.
Based on the quarterly median selling prices of land across the combined capital cities, the price of land at June 2013 was $232,000.
For anyone looking to build a home they have an initial outlay of $232,000 before all of the costs associated with construction, add in stamp duties and other expenses and it is no wonder that new homes are often seen as quite unaffordable.
Between June 1997 and June 2013, capital city median land prices have increased by a total of 273% from $63,000 to $232,000.
Over the same period, house values have increased by a total of 225%. The data suggests that it is land costs rather than construction costs driving up the cost of housing.
In order to try and combat the escalating cost of vacant land, developers have reduced the size of the typical vacant land lots being released.
In June 1997 the median lot size across the combined capital cities was 690 sqm, by June 2013 the median lot size had shrunk to just 468 sqm.
Based on this data, in June 1997 the typical vacant land would cost you $63,000 and would be 690 sqm in size for a rate per sqm of $90.82.
Given current pricing, the median price of a capital city block of vacant land is $232,000 and the median area is 468 sqm lot, providing a rate per sqm of $510.58. On these numbers, If you were to purchase a block of vacant land today at the median size from June 1997 (690 sqm) it would cost you $352,303.
If you look across the major capital cities you can see that the decline in median vacant land sizes has been recorded across the board over recent years.
Over the past 10 years, each city has seen a decline in typical lot sizes as developers attempt to combat the rising costs of vacant land.
In Sydney lot sizes have fallen from 648 sqm in June 2003 to 527 sqm in June 2013. Elsewhere the change in lot sizes has been: Melbourne (629 sqm to 463 sqm), Brisbane (720 sqm to 544 sqm), Adelaide (541 sqm to 375 sqm) and in Perth (608 sqm to 450 sqm).
By reducing the size of vacant lots it also provides the developer with a superior yield from their land developments, with the ability to deliver a greater number of lots.
It also leads to an escalation of housing costs on a rate per sqm basis. In Sydney, the median rate per sqm has risen over the past 10 years from $361/sqm to $576/sqm.
Elsewhere, the increases have been recorded at: Melbourne ($168/sqm to $467/sqm), Brisbane ($120/sqm to $410/sqm), Adelaide ($151/sqm to $488/sqm) and Perth ($162/sqm to $569/sqm).
The challenge for developers will be how much further they can afford to reduce vacant land sizes. In the main, vacant land is most abundant on the outskirts of capital cities and we would argue that buyers on the fringe of our cities are looking for larger lots rather than small lots. Given the compression of vacant land sizes it is no wonder we are seeing increasing demand for inner city units.
These units are often in a more desirable location and although they don’t have individual title they are often more affordable and much better serviced by amenity than fringe housing.
This analysis highlights that the reason why housing costs are high, particularly in the major capital cities, is largely a result of the escalation of the underlying cost of the vacant land.
Unfortunately, the restriction of development by governments, the time it takes for approvals to pass through councils and the additional costs associated with gaining an approval (infrastructure charges etc) are all passed on to the end user, the purchaser of the vacant land. This results in higher vacant land costs and subsequently a higher cost of the end product, a house.
If Governments want to reduce the cost of vacant land and subsequently housing, they should look to increase the amount of developable land, reduce the time approvals take and look to reduce the costs associated with the approval of a development. Of course this is not an easy solution because the challenge will then be who funds the necessary infrastructure upgrades and how do local government encourage increased development of local amenities.
Ultimately, local councils want a larger tax base and that comes with more homes which mean more ratepayers.
Although the three steps detailed will not necessarily fix vacant land affordability issues, we believe they would go some way to helping the issue.
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