Pete Wargent blogspot

CEO AllenWargent Property Buyers, & WargentAdvisory (institutional). 6 x finance author.

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Thursday, 7 January 2016

Sydney land values roar

Appreciating land

Strong and sustained population growth and rising land values are ultimately what underpin capital city property prices in Australia. 

Granted every so often a wag will write an article depicting a map of the entire antipodes, adorned with the witty caption "no land shortage here!". 

An obvious truism, and indeed land across most of Australia is accordingly very cheap! Alas the land which most people want to live on tends not to be quite so easy on the pocket book.

Sydney land values soar

Residential land values were driven sharply in Sydney again over the past year according to the latest data from the NSW Valuer General, with low interest rates, strong population growth, and infrastructure improvements cited as key contributing factors.

Apart from the Blue Mountains, where the median land value increased by 'only' 5 per cent in 2015, residential land values in Sydney showed substantial growth right across the board. 

One of the LGAs I have been targeting in recent times - see here, here, and here for example - has been Randwick, particularly due to the introduction of a new light rail route which will open up the south eastern suburbs of the city.

Note the enormous leap in Randwick land values in 2015 as investors latched on, though in fact almost everywhere in Greater Sydney saw another year of thumping gains in land values. 

Land values drive price growth

Experienced investors know that outer suburban fringe suburbs can deliver underwhelming results over time, since land is plentiful, land values and demand are lower, and, crucially, the land component comprises only a low percentage of property values.

Remember it is the land that appreciates, but most of the value in outer suburban properties tends to be in the building...which depreciates.

Of course, we do not expect to see prime location suburbs recording the largest percentage gains in any given year, since these locations are inevitably coming from a higher base, yet Randwick makes the top performers list even on this metric, with median land values in the suburb rising by 35 per cent in 2015.

Affordable options

That said, not everyone can afford inner suburban capital city property, so those without the budget need to be more thoughtful and considered. 

In May 2014 Property Observer ran a piece on where first homebuyers should look to buy. 

My recommendation was that first time buyers should look at Blacktown, with lenders accepting relatively small deposits at that time and plenty of upside potential for the suburb.

The results have been rather good to say the least, with median value of residential plots booming by nearly 48 per cent in the last 12 months alone. 

At the risk of stating the obvious that particular ship has now sailed, while auction clearance rates in Blacktown, the outer western, and south western suburbs suggest that prices in those locations are already correcting a bit.

Long term outperformers

Over the longer term, however, land value ratios and the nature of compounding growth ensure that the best performing properties will be those which sit on land with genuine scarcity and are in the highest demand. 

The highest dollar value gains were seen in Randwick (+$297,000) and Waverley (+$290,000), with Bondi continuing an outstanding run since 2008. 

Substantial increases in land values were once again seen in the eastern suburbs, the inner west, the nothern beaches, and the lower north shore in 2015, with the most highest land values situated in the east and the inner north.

The smallest dollar value increases in Greater Sydney median land values were seen in the Hawkesbury (+$42,000), Campbelltown (+42,000), Penrith (+$32,000), and the Blue Mountains (+$11,000).

Overall in 2015 land prices rose by another 22 per cent in New South Wales (despite declines in eight regional areas, including Muswellbrook and Cobar) with aggregate residential land values in the state rising close to $1 trillion.

Sydney housing bears now face the challenge of prices needing fall by a huge margin even just to get back to where they were at the beginning of 2014.