Why Our House and Land Prices Are Rising — and What It Means If You’re Planning to Buy
“The market” gets blamed for increases in price, and the people just wait around until “the market” turns back down. This never works. Shortages of land, delays in development, and an unwilling Reserve Bank to cut interest rates are all causing prices to increase quicker than many buyers expect, and nothing is turning back soon.
If you are deciding between house and land prices in Australia at the moment, here’s the bottom line: Prices are going up because there is not enough supply to meet the demand, and buyers who know why prices are going up will come out better off. Here’s the truth of it.
What Is Actually Driving the House-and-Land Values Up Now?
Let’s begin with interest rates, just as everyone else does. Market expectations have actually firmed significantly beyond a simple possibility, with a hike to 4.60% now priced in as a near certainty. ASX RBA Rate Tracker place the probability of a 25-basis-point increase to 4.60% at over 80% to 93%. If you are planning on cheaper financing to bail you out, then you are gambling on something that even the Reserve Bank hasn’t decided on yet.
Next up comes supply. By mid-September, market pricing had indeed moved toward a hike; most trackers had it in the high-70s to high-80s per cent range for a move to 4.60% at the September 29 meeting (helped along by a hot US jobs report and a Fed hike mid-month). But the “priced into the market” framing understates how split the actual forecasters are: NAB has been out front calling September as its base case, while ANZ and CBA have stuck with November, and Westpac’s position has moved around depending on which week’s note you read; it was the lone holdout for a while before some sources had it flip to September too.
Are Land Prices Rising Faster Than Building Costs?
Mostly yes, in growth corridors, and that is precisely the part buyers often misread. The cost of titled land in established estates is the tightest bottleneck in the supply chain at present, with developers staging their projects much more conservatively than the demand requires. ABS figures show the average value of approval for a new home is over $517,000, up around 5% from the previous year. So, building costs are rising, but scarcity of land is generally the bigger factor in growth corridors outside the metro area.
That is where most buyers get their priorities completely reversed. Instead of thinking about the total cost of buying the land they will build on, they tend to focus purely on the cost per square meter of the build and neglect the land part, which is precisely where the premium will be after the estate has matured.
If you wish to have an honest conversation about growth corridors that still have some value left, the best time would be before the deposit is locked in.
Should You Wait Until the Market Prices Have Cooled Down to Buy?
Not waiting is not a plan, but a gamble, and not necessarily a good one when demand exceeds supply. The majority of people who “wait for things to cool down” end up buying two years from now at a higher price, and with even more leverage, than before. Here’s what normally occurs during your wait:
- The release of land in the subsequent phase is more expensive, as supply has failed to catch up.
- Interest rates stay high for longer than advertised, subtly eating away at any savings.
- Building costs continue to pile up each month, directly affecting the bottom line of construction costs.
- Your ability to borrow shrinks as income growth lags behind price growth
What Does This Mean for Property Investors in Australia?
For property investors in Australia, increased land and build costs mean a different equation. The game isn’t about playing with the lowest deposits possible or the most attractive rent yield prediction, but about looking for areas with restricted supply due to actual population growth rather than a prediction in a slide deck.
Those who have structured their finances with some leeway, and not stretched their budget to the limit of what the bank is willing to lend, are the ones who remain standing after this rate cycle. Good structure wins out over good hopes of a rate cut, which has yet to happen.
How Should You Make Your Buying Decision in This Market?
Think twice before you put pen to paper and get the numbers straight before you make any commitments:
- Compare the price of the land to the last three real settled sales, not indicative listing prices, in the estate.
- Always allow yourself a buffer of at least 10% for changes in building costs.
- Arrange your financing ahead of time with a rate rise test, not current rates.
- Stay away from contracts that have uncertain site cost conditions.
- Make sure of the builder’s track record in completing houses after the day of settlement.
Why Is Property Management Important After Settlement in Australia?
It’s only part of the story, as after the property settles, it’s property management in Australia that will decide if the profits on paper become real. The length of vacancy, the type of tenants, and lack of maintenance cut into profits far quicker than expected.
Even when a property has been purchased wisely, mismanagement will reduce its performance, sometimes seriously. Manage the investment with the same consideration that was taken into the purchasing of it, for it’s the management that makes the difference.
Prices Are Not Going To Wait For You
Don’t use rising prices as a reason not to invest. It is a sign of a disrupted supply chain, and inaction comes at a price. Those investors who act on discipline and not emotions and FOMO will be those with real property portfolios in five years, while wait-and-see people will be waiting for more.
And it is precisely this type of market where it becomes crucial to have a team that sources only vetted deals, sets up your financing with a proper buffer, and then manages your asset once you become its owner. At Simply Wealth Group, we’ve been working for years with average Australians who need to make a sensible decision on whether to invest in this type of real estate cycle or not. We give unbiased property advice instead of trying to sell you something.
Book yourself a free consultation on your investment strategy with us.
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FAQs:
Why are houses and land packages generally more expensive in outer growth areas rather than established suburbs?
Often, this has nothing to do with the distance of the area to the city center but with the time when land is released compared to when infrastructure is provided. When there is a land release that is less than the rate of population increase in the corridor, each land release will be priced higher compared to the previous ones because of lower supply.
How much of the increase in land price depends on the increase in construction cost versus land scarcity?
The construction cost plays an important part but is often a minor factor. Land prices in corridors with approval lag population growth, thus increasing faster than construction costs. This explains why the comparison of quotes alone may not give the whole story.
Will signing a fixed-price building contract secure me from further increases in price while my house is being built?
Somewhat, yes, since you already have the fixed price for the construction cost, but not for site costs, provisional sums, and approved variations.
Is it now possible to purchase an off-market deal for less than the market median in the current cycle?
Yes, however it involves identifying the corridors which suffer from actual supply constraints and acting fast within the early stages of a release, rather than purchasing a project which has already had its price discovered by the market.
What do I need to know about the builder apart from the price?
Completion dates of the last few projects completed, project backlogs, and how the builder manages any variations in costs for sites purchased, as their past performance gives a clue as to what the final “estimate” will end up being when you move in. This is one of the first questions that we ask at Simply Wealth Group before presenting any package to a client.
