Melbourne land performs strongly over past four years: BIS

The Melbourne land market has performed strongly over the past four years in response to a sustained undersupply, according to BIS Oxford Economics.

Surging population growth supported by improving economic conditions have combined with low interest rates to see underlying demand for dwellings steadily rise.

Initially, land prices were also largely affordable relative to the existing outer Melbourne housing stock, enabling pent-up demand to be released into the market.

Through this period, the numbers of new estates being marketed increased dramatically, with outer Melbourne lot production rising to a record 21,400 lots in 2014/15 and averaging 21,050 lots per annum over 2014/15 to 2016/17. Corresponding land price growth has also seen new house affordability deteriorate.

The significant rise in new land and house activity has been exceeded by new apartment construction, with this sector forecast to enter a modest oversupply from 2017/18, with potential knock-on effects to the new house and land market.

Likely falls in apartment prices may encourage the purchase of apartments instead of houses, while more competitive apartment rents may delay some first home buyers purchasing a new house.

While lot production is likely to hold up over 2017/18, it is expected to fall away over the following two years. Land prices are also expected to flatten out, or even decline as developers offer incentives to purchasers. The downturn is forecast to be brief and moderate, with a rising undersupply forecast to quickly re-emerge and drive the next upturn by the end of the decade.