Demand for residential land to remain subdued on Melbourne and Adelaide fringes till 2017: BIS Shrapnel

The production of residential lots on the outskirts of Melbourne is forecast to fall 27% annually over the next few years as demand remains subdued, according to a new report by BIS Shrapnel.

The research firm is forecasting annual lot production to fall from an average of 16,917 lots annually from 2007 to 2012 to just 12,340 between 2012 and 2017.

A 22% decline is anticipated for outer Adelaide, with average lot production of 2,962 lots between 2007 and 2012 falling to 2,320 over the next five years.

Recent and Forecast Lot Production

Source: BIS Shrapnel

The forecast comes as Melbourne house-and-land developers continue to offer incentives in an effort to encourage buyers, despite warnings from the likes of Australand's Rob Pradolin that these only distort the market and can create financing problems for buyers.

“These two markets experienced the strongest residential rebound after the global financial crisis (GFC), and the consequent combination of high levels of land production and solid land price growth has meant that there is little pressure on the demand for new houses and land,” says report series author and senior manager Angie Zigomanis.

Victorian residential developers have also lost the added sweetener of the $13,000 new home bonus, which was available to first-home buyers and ended in June. According to BIS Shrapnel, the bonus has pulled forward demand.

In its annual report, developer Peet– which has 19% of its land bank in Victoria – notes that the Victorian residential market “weakened sharply” during the year, with the result that it has “restrained capital expenditure on some key Victorian projects”.

Peet has deferred development in two large, company-owned projects in Victoria until there are signs of improvement and also notes that Victorian buyers have had difficulty securing finance with the market having reached “the top of its cycle”.

“The declines in lot production in the Melbourne and Adelaide markets reflect activity falling from unsustainable record levels, while the weakness in the other cities were the result of excess supply, weak underlying demand, and constrained affordability after land prices had peaked in earlier years,” says Zigomanis.

“These issues are now starting to wash through, with the recent declines in interest rates expected to be the trigger for a pick-up in demand into 2013.

“Conversely, the factors that drove the downturns in the other cities now exist in Melbourne and Adelaide and it will be their turn for demand for land to experience a period of weakness,” he says.