Why is land so expensive?

By David Clegg

The Situation

One of the reasons for the dramatic inflation in land prices is that despite high demand from ongoing immigration and strong local population growth, the availability of new land for housing development continues to fall. The current backlog of housing in Australia – ie, the amount of houses needed – is estimated to be 200,000 units. The shortfall increases by a minimum of 15,000 per year, according to estimates of the Housing Industry Association.

The Projection

The National Housing Supply Council’s 2nd State of Supply Report 2010 found that demand for housing in Australia is expected to grow strongly over the next 20 years, with an additional 3.2 million dwellings needed to meet underlying demand by 2029. The gap between supply and demand is also likely to grow over this period, with a projection of a 640,600 dwelling shortfall by 2029.

Why land is so expensive

1. No National Housing Plan
2. Long delays in planning and rezoning processes
3. Environmental compliance requirements
4. Infrastructure costs
5. High price expectations for raw land
6. High property prices welcomed by some
7. Banks are withholding finance from developers

What does this mean?

In Brisbane, the median price of a new block of land has pushed through the $200,000 barrier. When you consider that you would need to spend a further $150,000 to $200,000 to put a house on it, it’s no wonder our housing affordability index is the worst in the developed world.

We saw earlier that the price of land in some capital cities virtually tripled in the past eight years. What would be the impact – and price of land – if it tripled again in the next eight to ten years? Is it possible that a small block of land in a city would cost $600,000 in 2020?

Let’s consider these questions:

• Will migrants stop coming to Australia in their hundreds of thousands?
• Is our current birth rate likely to slow down?
• Will the sellers of raw land accept less money for it in the future?
• Will the government and state agencies start to coordinate their activities?
• Will environmental and green considerations go away?
• Will infrastructure and utility companies reduce their current charges?
• Will developers work for smaller margins to bring projects into play?
• Will the state governments find other sources of revenue and stop taxing property so hard?
• Will Australians decide to live in remote areas rather than in the towns and cities near the coast?

If you are like me and you don’t think that much is going to change, the only conclusion is that the present rate of inflation in land prices (and therefore property) is going to continue. In fact it might increase even faster, meaning that those who are lucky enough to own land will be sitting pretty, and those unlucky enough not to, will be locked out indefinitely.

How can you benefit?

We saw earlier that the price of land per square metre has tripled in the eight years from 2001 to 2009. If you had known in 2001 what would happen to the price of land, how much of it would you have bought back then? A little? Or as much as you could afford?

If you already own property – for example your family home, or an investment property, or both – you already have the inside lane! With your equity, the solution is to use this as a deposit on a new investment property, which will enable you to:

• Buy a new block of land
• Build a house on it
• Lease it and get monthly rental income
• Get government concessions that can reduce your income tax
• Build your income for future years.

How does that sound to you as a strategy to benefit from what is almost certainly going to happen over the next 10 to 20 years?

For more information on how you can put the Australian property dynamics to work for you, and to build a future income stream to replace your employment income, please call 1300 733 895, or email us at info@incent.com.au.

About David Clegg

David is well qualified to speak on personal investment and retirement strategies, having worked with some of Australia's largest financial institutions and in direct property investments over the past 20 years. Prior to that David worked for the Government in the Pensions area.

David has completed a Diploma in Financial Services & has also presented a number of adult education courses on investment at Sydney University.