Sydney house and land development to double in next two years: BIS Shrapnel

New house and land activity in Sydney is expected to double over the next two years, according to property market analysts BIS Shrapnel.

Sydney lot production is expected to rise from the current estimated 3,000 lots per annum to a peak of 6,100 lots per annum by 2013-14 as outer Sydney accommodates much of the upturn in new house activity, according to BIS Shrapnel’s Outlook for Residential Land, 2011 to 2016.

This is still below the 7,600 lots per annum average over the five years to 2001 and reflects the still-high cost of land, which will maintain the shift to less expensive medium- and high-density dwellings and infill and knockdown development in established areas.

Further strengthening of economic conditions and income growth will improve the relative affordability of new housing in Sydney, the report says.

Melbourne has been the hotspot for new housing development in Australia over the past five years, with more than 16,000 lots produced annually from 2006 to 2011. However, this is forecast to decline to an annual average of 15,000 over the next five years.

New house and land activity softened or fell in all major markets in 2010/11, due to the expiry of the First Home Owner’s Grant Boost Scheme, the sharp interest rate rises in 2009-10 (and further rise in November 2010), and slowing economic growth through the year, according to the report.

The fall in lot production was most profound in the southeast Queensland markets of Brisbane, the Gold Coast and Sunshine Coast, which collapsed to long-term lows, reflecting the underlying oversupply of dwellings across the region.

All other capital cities with the exception of Sydney and Perth also experienced a fall in lot production in 2010/11

After record lot production in Melbourne and new record levels in Adelaide in 2009-10, any pent-up demand pressures have now well and truly eased, and activity is slowing, the report says.

According to senior project manager and report series author Angie Zigomanis, in addition to the rising deficiency developing in a number of markets and the benign interest rate outlook driving a return of purchaser confidence, first-home buyer demand also appears to have bottomed out, “with the ‘pull forward’ effect created by the First Home Owner’s Grant Boost Scheme having been largely worked through”.

“We expect a slow recovery in first-home buyer demand through 2012, which will help to underpin upgrader demand for new houses and land.”

As a result BIS Shrapnel forecasts the residential land market to pick up nationally over 2011-12, and accelerate over 2012-13 as economic growth also strengthens.

Over 2013-14 the environment will begin to deteriorate again as interest rate rises eventually have an impact across all markets. The gains in employment and income growth up until then will overcome some of the initial rises and will continue to support activity.

But as inflationary pressures become more acute as the resource investment boom peaks and creates skills shortages and wages pressure, a sharp tightening in interest rates is expected, taking the standard variable rate to a forecast peak of 8.75% in the first half of 2014.

This will have a negative impact not only on residential demand, but the economy as well, with residential activity forecast to enter a downturn over 2014-15, BIS Shrapnel says.