Melbourne residential land sales bust

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RPM Group’s latest Greenfield Market Report shows a sharp slump in house and land sales in Melbourne’s outer-suburban growth corridors.

Specifically, lot sales fell 14% in the three months to June compared to the previous quarter, and were down 41% year-on-year. This was a bigger downturn than anticipated. However, the slump in sales has yet to impact lot prices, which hit an all-time high:

The greenfield property sector experienced slower than expected results in Q2, due to the number of macro-economic factors influencing decision making and consumer sentiment…

New home demand was expected to normalise through the first half of 2022 following record sales levels underpinned by HomeBuilder and historic low interest rates, given it was not sustainable long-term from either a demand or supply perspective. But the emergence of significant headwinds has exacerbated this cyclical downturn, with strong inflation growth, rising interest rates and construction constraints all contributing factors…

Gross lot sales across Melbourne and Geelong growth areas in Q2 2022 were down 14% from the previous quarter and 41% year-on-year. The resultant 4,534 lot sales was the lowest quarterly total in two years. This led to lot absorption falling below new supply, with 5,036 releases. Nevertheless, the average time spent on market in Q2 2022 was relatively quick at 35 days, with product offering in more recent lot releases better reflecting current demands.

New home demand has shifted markedly this year, with buyers increasingly favouring smaller lots to compensate for higher build costs and increased borrowing repayments… Subsequently, while the median lot size for Melbourne shrunk by 1.1% to a record low of 366 square metres, the median lot price has grown 3.6% to $379,000. This results in stronger per square metre lot price growth, with the median across all corridors now surpassing the $1,000 mark.

Commenting in the result, RPM project marketing managing director Luke Kelly noted:

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“Many buyers have been forced to re-assess their borrowing capacity and re-evaluate their buying decisions in light of interest rate rises. At the same time, they’re facing increasing residential construction costs, rising living expenses fuelled by inflation and higher home loan repayments”…

“This is leading to a subdued market in the coming months, with a number of prospective buyers deciding to sit on the sidelines as a result of the uncertain climate.”

Land developer Nigel Satterley, head of Perth-based Satterley Group, claimed that the falling demand will soon cause a “big price correction”:

“There will be a big price correction. This is a correction being driven by fast rising inflation. That is driving volatility in real estate trust stock share prices. Obviously, the residential outlook is worse than it was six months ago.″⁣

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The second chart above says it all. Lot prices have inflated to extreme levels (i.e. over $1,000 per SQM), suggesting a price correction is inevitable.

About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.