The start of a recovery in new lot production is expected in Sydney, South-East Queensland and Perth over 2011/12, but will continue to weaken in Melbourne and Adelaide, according to BIS Shrapnel.
The industry analyst and economic forecaster's Outlook for Residential Land, 2011 to 2016 report series shows that due to the end of the First Home Owners Boost, interest rate hikes over 2009/10 and slowing economic growth, new house and land activity softened or fell in all major markets in 2010/11.
The fall is creating a rising undersupply in some markets, the company says, and with a better outlook for the interest rate and strengthening economic conditions, "new house and land activity will begin to recover in those markets where the deficiency will be most pronounced".
New lot production in 2010/11 was significantly impacted by the end of the First Home Owners Boost, says senior project manager and report series author Angie Zigomanis. This is not just because of a fall in demand from first home buyers, but also indirectly due to demand for entry level dwellings preventing upgraders from selling their dwellings to buy a new property.
"Following the expiry of the Boost, first-home buyer demand in 2010/11 was around half that of the stimulus-induced peak of calendar 2009, reflecting the pulling forward of demand to take advantage of the incentive," says Zigomanis.
South-East Queensland and all capital cities except Sydney and Perth saw a fall in lot production in 2010/11. The report says following record lot production in Melbourne and record levels in Adelaide in 2009/10, "any pent up demand pressures have now well and truly eased, and activity is slowing".
Lot production in Brisbane, the Gold Coast and Sunshine Coast has dropped to long-term lows, which reflects the underlying oversupply of dwellings.
"However, there is light at the end of the tunnel," explains Zigomanis. "A rising deficiency is developing in a number of markets, while a benign interest rate outlook will see purchaser confidence begin to return, particularly with the flow on effects from rising resource investment forecast to permeate through the rest of the economy from 2012.
"First home buyer demand also appears to have bottomed out, with the 'pull forward' effect created by the First Home Owner's Boost 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."
BIS Shrapnel expects the residential land market to pick up in Australian over 2011/12 and with economic growth strengthening the following year, it's expected to accelerate.
The upturn will be focused in Sydney, Perth and South-East Queensland, which are building new dwellings well below the level required by population growth and where the underlying dwelling deficiency is increasing or, in the case of South-East Queensland, will emerge," BIS Shrapnel says.
The shortage of dwellings in Melbourne and Adelaide has been shrinking due to new dwelling construction, and could be moving to oversupply. Lot production is expected to fall from the "extremely high levels", but will remain relatively high over the long-term.
"Pent up demand in those markets where there is a rising deficiency will be supported by a stable interest rate environment as well as rising employment and income growth from a recovery in economic conditions, which will help confidence return to the market through 2011/12," says Zigomanis. "This will stimulate activity in housing markets and consequently land markets.
Nevertheless, new house and land activity will vary nationally, depending on overall affordability in each market, and the level of pent up demand."
In the long-term, the company expects the demand for new houses, and therefore land, will start to deteriorate over 2013/13 as interest rates rise. It says gains in employment and income growth will overcome some of the initial rises and 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 per cent in the first half of 2014," the company warns. "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."