Strong growth for outer Sydney land market: Angie Zigomanis

Strong growth for outer Sydney land market: Angie Zigomanis
Strong growth for outer Sydney land market: Angie Zigomanis

GUEST OBSERVER

The outer Sydney land market is now in a strong growth phase, after being in a downturn for the best part of a decade. Rising land development in Outer Sydney has been driven by improved affordability, improved land availability, and improved transport infrastructure provision.

We have profiled the various indicators relating to demand, dwelling and lot supply, and prices, in the outer Sydney land market, with a focus on the north west and south west corridors, as well as the central coast. The regions are defined as follows:

North West (The Hills Shire, Blacktown and Penrith LGAs)
South West (Wollondilly, Camden, Campbelltown and Liverpool LGAs)
Central Coast (Gosford and Wyong LGAs).

STOCK DEFICIENCY

Very low new dwelling completions between 2006/07 and 2011/12 saw a sizeable dwelling deficiency emerge in the Sydney market by June 2012. The combination of dwelling deficiency and improved affordability via low interest rates has been the key driver of the upturn in Sydney residential prices and demand for new housing. Completions have grown from a low of 18,400 dwellings in 2011/12 to 35,200 dwellings in 2014/15. While significant growth has occurred in high density dwelling commencements  which rose by 123% in this time, new separate house starts have also increased by a sizeable 57% from 8,000 houses to 12,500 houses in the same period. This has been met by strong population growth, as New South Wales benefits from a strong, albeit easing, net overseas migration inflow, and a record low net interstate migration outflow, which has sustained the dwelling deficiency in Sydney despite rising supply. 

 

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Strong growth for outer Sydney land market: Angie Zigomanis

 

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Strong growth for outer Sydney land market: Angie Zigomanis

DEMAND

Population Growth

Greater Sydney’s population growth slowed from 49,100 persons per annum over 1996–2001, to 30,700 persons per annum over 2001–2006 as a result of slowing net overseas migration and larger net interstate migration outflows. The impact was felt in Outer Sydney, with Inner and Middle Sydney population growth remaining largely unchanged.

Population growth recovered to 70,600 persons per annum over 2007–2011 as both net overseas migration boomed and net interstate outflows moderated, with Inner and Middle Sydney accounting for the majority of this increase.

Population growth has continued to strengthen over 2011 to 2015 to an estimated 79,200 persons per annum, with Outer Sydney now accounting for the larger share of the increase, are driving the emerging recovery in the broadhectare land market.

Greenfield development

Infill development of new houses can take place as knock downs, as well as new houses being built on infill or brownfield sites. The level of infill activity generally moves in line with the cycle, however it is significantly more stable than demand for greenfield houses being constrained by the more limited availability of sites.

As a result, any upturns in new house demand are accommodated by the more plentiful greenfield land. Over the 2001 to 2015 period, greenfield land is estimated to have accommodated around 44% of Sydney’s new house demand, being as low as 22% (in 2009) and as high as 70% (in 2001). Greenfield land is estimated to be accommodating around 55% of new houses in 2014/15.

House affordability

Housing affordability, as measured by mortgage repayments at the prevailing variable interest rate on 75% of a median priced home in Sydney as a percentage of average household disposable income for New South Wales, has averaged 33% over the twenty two years to 2014/15 (Chart 3).

The upturn in Sydney prices was initiated as interest rates fell and the affordability ratio moved below the long term average. However, subsequent price rises drove further demand and price growth, with mortgage repayments on a median priced home of 37.7% of household disposable income at June 2015, currently worse than the long term average and approaching some of the worst levels recorded in 2004 and 2008. Further price rises will put house prices increasingly under pressure, particularly if interest rates also rise. 

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Strong growth for outer Sydney land market: Angie Zigomanis

 

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Strong growth for outer Sydney land market: Angie Zigomanis

Land affordability

The key to the upturn in the Sydney land market has been the improved affordability of new houses relative to the increasing median house price. Through the middle of the 2000s, the ratio of land prices to house prices, or alternatively the premium of buying a new house over an established house in Outer Sydney was at a worse level than in the 1990s and early 2000s.

However, the price of land relative to established housing in Outer Sydney has improved from 72% in 2005 to 52% in 2015—better than the late 1990s average. Conversely, the median new home cost is now slightly below established house median prices. 

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 Strong growth for outer Sydney land market: Angie Zigomanis

SUPPLY

Land Production

Lot production was extremely low in the 2006 to 2010 period, with Outer Sydney producing just 1,900 lots on average over this timeframe.

Since the upturn, lot production in Outer Sydney has surged, reaching 6,000 lots in 2013/14 and is estimated 4,500 to have risen to 8,100 lots over 2014/15, which 4,000 represents a 35% increase.

Over the long term, North West Sydney (The South Melbourne, Blacktown, and Penrith LGAs) has generally accommodated 48% of lot production in Outer Sydney.
In comparison, South West Sydney (Liverpool, Camden and Campbelltown LGAs) has accommodated around 36%, and the Central Coast (Gosford and

Wyong LGAs) has accounted for 13% (Chart 5). More recently, the limited new lot supply elsewhere means that Outer Sydney lot production is now roughly evenly split between North West and South West Sydney. 

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Strong growth for outer Sydney land market: Angie Zigomanis

Lot Size

The median size of new lots in Outer Sydney has been falling since 2000, from over 700 square metres to below 500 square metres for the first time in 2013/14. 

While lot sizes remain low in a long term sense, there has been a small increase in lot sizes in 2014/15 as developers increasingly serve the upgrader market as price points move beyond the realm of first home buyers. 

The strong demand for land in Sydney means that developers are producing more profitable larger lots to target the upgrader market. Meanwhile, the first home buyer market is increasingly being serviced by the established home and apartment market. In new estates, the most affordable housing is being provided in integrated developments rather than small lots.

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Strong growth for outer Sydney land market: Angie Zigomanis

PRICES

There was a correction in both land and house prices (as well as new house activity), through the latter half of the 2000s. Between 2005 and 2009, the Outer Sydney median land price fell by 10.5%, or a 20% decline in real terms. 

With Outer Sydney median land prices over 2009 to 2013 remaining relatively flat (+4% increase in total), Outer Sydney house price growth returned (+25% in the same period), and land affordability improved back to 1990s levels. 

Further strong growth in Outer Sydney median house prices in 2014 and 2015 (totalling +31%) has taken the median house price to an estimated $650,000 at June 2015. Growth in land prices has also returned although still remains below that of house prices (+21%) indicating a median of $335,000 by June 2015. This lower growth in land prices has allowed the cost of new houses to become more affordable relative to established houses and enabled upgraders to more easily sell their existing dwelling to upsize to a new home. 

 

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Strong growth for outer Sydney land market: Angie Zigomanis

 

Angie Zigomanis is senior manager, BIS Shrapnel and can be contacted here.

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