There's a biting undersupply of land being made available for development: Pete Wargent

Another day, another media article about over-building in Sydney which will apparently lead property prices to come crashing down.

This is something I discussed very briefly here previously, in response to an article on ABC which referenced my data. 

The problem in cities such as Sydney, is not an necessarily an undersupply of total dwellings per se.

We'll always manage to shoe-horn in enough new 50 square metre flats, no worries at all.

Rather, the issue is one of a gross mismatch of supply, and an utterly chronic shortage of land being made for development in relation to the demand for it.

Over the short term, nobody can say with any certainty what will happen to prices - there have certainly been enough dreadful predictions over the past 15 years to prove that to be true.

The longer term problem is that with so little land being made available for development, the replacement cost of housing is set to continue rising faster than household incomes growth. 

Land supply bites down hard in 2014

Indeed, a biting undersupply of land being made available for development is already launching land prices across Australia's capital cities into orbit. 

CoreLogic-RP Data released its excellent property capital cities markets report which you can read here.

It showed that over 2014 the median land price increased by a ripsnorting 17.4% to $283,000.

Compounding land prices

CoreLogic-RP Data's analysis shows that land prices have continued to rise at a compounding annual rate of 8.2% per annum over the past two decades.

The nature of compounding growth is such that these increases over time can become outlandish, and in fact land prices have increased by 382% over the past 20 years, while median lot sizes are declining. 

This is partly a consequence of Australia's strong population growth, and also of employment growth which is focussed so overwhelmingly upon four capital cities plus regional Queensland.

20 years ago 684 square metres of land for residential development in a capital city would on average have cost you $58,750. 

Today, that same 684 square metre lot would set you back $365,256.

Not typically the dynamic one would associate with a longer term easing of dwelling prices, but you never know.

PETE WARGENT is the co-founder of AllenWargent property buyers (London, Sydney) and a best-selling author and blogger.

His book 'Four Green Houses and a Red Hotel' is out now.