Long, slow road to recovery for Melbourne residential land market, with prices to fall further: Charter Keck Cramer

There will be no swift recovery in the outer-Melbourne residential new housing market, with a confluence of factors contributing to the unprecedented high rate of lots being returned to residential developers, according to Charter Keck Cramer.

The most recent update of the National Land Survey – a project undertaken by consultants Charter Keck Cramer (CKC) in conjunction with Research4, which tracks the performance of capital city residential land markets – found that 30% of Melbourne greenfield land had been returned by building companies to developers in the September quarter.

This compared with an already high average cancellation rate of 23% over the past 12 months and a cancellation rate of only 4% during the property boom from June 2009 to December 2010.

CKC director Robert Papaleo tells Property Observer there may have been a degree of artificiality in the September quarter cancellation rate, but there is likely to be a “long, slow recovery” for the Melbourne land market, with the current downturn exaggerated by the swift nature of the upswing over the 2009-10 period as prices rose by an “unsustainable” 15% to 20% ever quarter.

Papaleo says the jump in cancellations recorded in the September quarter to one in three may be partly due to the fact that listed developers – the main players in the Melbourne land market – have used incentives and other selling strategies to lift their contracts on hand and present healthier-looking numbers in their financial results.

Most developers reported annual financial results to the end of June.

Papaleo says some developers relaxed their selling terms to secure sales, including requiring in some cases that buyers pay only a $500 holding deposit, rather than the traditional 10% deposit.

“These are the lots that are being returned – they are also the smallest lots and the lowest price products,” says Papaleo.

He says such selling practices have been common in the south east Queensland and Brisbane market for at least two years, but are now being used to some degree in Melbourne.

In addition, the $13,000 state government handout for those buying or building a new home ended on June 30, which also may have contributed to a drop in demand.

The December quarter update to the land survey – out in early 2013 – will provide further evidence if the spike in the cancellation rate was exacerbated by these factors or is a longer-term trend.

What does remain though is a current a peak residential lot “overhang” of around 5,000 lots – land held mainly by listed developers – with is likely put further pressure on pricing.

“We are in for a lot of pain, and there is no clear sign of a turnaround either," says Papaleo.

Papaleo says the current incentives being offered by residential developers – ranging from $10,000 to $50,000 – are being dissolved into the pricing, causing a “re-benchmarking to remove the distortion”.

“This will result in the need for a reduction in the price.” he says.

The market has also not been helped by a rise in supply following plans announced in June to extend Melbourne’s urban growth boundary outwards over the next 20 years to incorporate six new fringe suburbs and provide new homes for up to 100,000 people.

There are currently 24 precinct structure plans (PSPs) in various stages of planning, according to Melbourne’s Growth Area Authority, with each PSP catering for master-planned residential communities of between 10,000 to 30,000 people.

“Supply has been forced up at the worst possible time,” says Papaleo.

According to Papaleo, a pick-up in overseas migration will have flow-on effects for the Melbourne property market and help spur a recovery in the fringe residential new housing market.

“Net overseas migration has come off the bottom of its cycle, but there is usually a 12 to 18 month lag before it feeds into the housing market,” he says.

A pick-up in overseas migration could result in a rise in demand for fringe housing from these new arrivals but could also see them acquiring established housing and those displaced residents choosing, in some cases, to buy a lifestyle property on the outskirts of the city.