No quick recovery for Melbourne new home market

By Leith van Onselen

Following BIS Shrapnel’s warning earlier in the month that the Melbourne housing market would remain in the doldrums for up to five years, consultants Charter Keck Cramer are now warning that it will be a long, slow road to recovery for Melbourne’s outer suburban new house and land market. From Property Observer:

There will be no swift recovery in the outer-Melbourne residential new housing market, with a confluence of factors contributing to the unprecedented high rate of lots being returned to residential developers, according to Charter Keck Cramer.

The most recent update of the National Land Survey – a project undertaken by consultants Charter Keck Cramer (CKC) in conjunction with Research4, which tracks the performance of capital city residential land markets – found that 30% of Melbourne greenfield land had been returned by building companies to developers in the September quarter.

This compared with an already high average cancellation rate of 23% over the past 12 months and a cancellation rate of only 4% during the property boom from June 2009 to December 2010.

CKC director Robert Papaleo tells Property Observer there may have been a degree of artificiality in the September quarter cancellation rate, but there is likely to be a “long, slow recovery” for the Melbourne land market…

Papaleo says the jump in cancellations recorded in the September quarter to one in three may be partly due to the fact that listed developers – the main players in the Melbourne land market – have used incentives and other selling strategies to lift their contracts on hand and present healthier-looking numbers in their financial results…

Papaleo says some developers relaxed their selling terms to secure sales, including requiring in some cases that buyers pay only a $500 holding deposit, rather than the traditional 10% deposit…

In addition, the $13,000 state government handout for those buying or building a new home ended on June 30, which also may have contributed to a drop in demand…

What does remain though is a current a peak residential lot “overhang” of around 5,000 lots – land held mainly by listed developers – with is likely put further pressure on pricing.

“We are in for a lot of pain, and there is no clear sign of a turnaround either,” says Papaleo.

Papaleo says the current incentives being offered by residential developers – ranging from $10,000 to $50,000 – are being dissolved into the pricing, causing a “re-benchmarking to remove the distortion”.

“This will result in the need for a reduction in the price.” he says.

The market has also not been helped by a rise in supply following plans announced in June to extend Melbourne’s urban growth boundary outwards over the next 20 years to incorporate six new fringe suburbs and provide new homes for up to 100,000 people.

There are currently 24 precinct structure plans (PSPs) in various stages of planning, according to Melbourne’s Growth Area Authority, with each PSP catering for master-planned residential communities of between 10,000 to 30,000 people.

“Supply has been forced up at the worst possible time,” says Papaleo.

While I agree with most of what Papaleo has said, I think it is wrong to blame the recent extensions of Melbourne’s urban growth boundary (UGB) for the malaise in the house and land market. Had the UGB never been implemented in the first place, and more land was available for development (along with quicker approval processes, etc), it is highly likely that fringe land values would never have risen to such heights and the market would not be in its current vulnerable state.

The situation facing Melbourne is a classic case of unresponsive supply, whereby the supply of land/new housing responds years after prices have risen, causing more pain on the way down. Extreme examples of these dynamics can be found in inland California, Nevada, Arizona, Florida, Spain and Ireland, where the supply response was late and hit after home prices had already risen and demand had collapsed.

Twitter: Leith van Onselen. Leith is the Chief Economist of Macro Investor, Australia’s independent investment newsletter covering trades, stocks, property and yield. Click for a free 21 day trial.

Comments

  1. yes – and lets not pretend this is “malaise”. This is good news. Developers/bankers/investors have had it too good for too long. The state govt has also had it too good for too long by relying on inflated stamp duty receipts spurred on in no small part by state / federal grants. The outer suburbab market is toast and will be for some time.

    Given i have not intention of buying there I ponder the impact on inner / middle suburbab markets. I dont buy REA args that these are unrelated markets. What do people think re potental impacts here? I see the following impacts:
    – less equity from FHBs upgrading from outer to spend on inner
    – rent remaining depressed across the board (people will always have the option of moving to an outer suburb if teh rent differential gets too big)
    – banks become more exposed, lower cap ratios ie lending needs to be constrained across the board.
    – nervousness from overseas investors will affect lending across the board.
    – the “trickle” mentality may set in eg if I have to pay 450k for a ppty 30ks out, i may be happy to pay 550k for a ppty 20k out. But if the 450k ppty drops to 350k, am I happy to pay 550k for the other house?

    • Fawkner to Parkville 10K

      Fawkner prices : 300K
      Parkville prices: 1.5M

      That’s quite a gradient almost an order of magnitude in 10 km, nature does not like steep gradients.

      • Take a professional / managerial couple full time working in the city over a 20 year career. Where would they choose to live and why?
        Difference in house price $1,200,000
        Difference in peak hour travel time one way say around 40 minutes.
        Multiply that out and they’re valuing their saving in travel time at around $100 per hour each – quite a bit of money but not out of the question for this demographic. And not to mention the greatly superior convenience of Parkville for most non-work activities.

  2. Dear Mr Baillieu,

    1.End the Vic FHB grant for existing homes effective immediately.

    2. Do not approve any more new land sales to developers with landbanks bigger than 10yrs of supply.

    Signed

    Vic HIA members

  3. In hindsight, wouldn’t it be great if all land was govt. owned and was “leased back” to the homeowner through rates/levies? This way people might have realised that the sum value of a home is (a) the structure, and (b) the land component. People spending $500k for a McMansion in the far outer suburbs that cost $150k to build is ludicrous!

    Although it’s not great to see anyone lose their home or financial independence, the devastation that will follow a correction in prices is a necessary lesson for the relentless ignorance and financial illiteracy of most Australians.

    • …unfortunately a big chunk of those fuelling the ponzi are late 40’s and beyond. Almost every one of them I speak to (who have investment properties) have the same strategy: sell at retirement to repay debt, and be left with a tidy sum at the end. A strategy predicated on prices doubling every 10 years, and having sufficient demand to swallow up the approx 2 million homes that are up for trade over the next 10 – 15 years

  4. The RBA and the Federal Government are responsible for the property bubble.

    The RBA kept interest rates way below historic levels throughout the noughties, encouraging drips to borrow way too much money, way beyond their capacity to repay.
    Then the Feds allowed foreigners (Chinese) to buy property, and they outbid locals and forced the prices to unsustainable lows.
    The word that comes to mind is INCOMPETENCE Yeebd p

  5. “What does remain though is a current a peak residential lot “overhang” of around 5,000 lots – land held mainly by listed developers – with is likely put further pressure on pricing.”

    Anyone know how this 5000 number is calculated?