Despite strong underlying demand and dwindling supply, developers are being discouraged from building in Sydney due to high construction costs.
Growth in property values across NSW was painfully slow in the three months to August 2007, according to Residex, with median values in Sydney increasing by just 0.21%, and regional values lifting only 0.63%.
This flat growth is a reflection of the fractured property market in Sydney, which is currently running at two different speeds; high-end properties in the eastern suburbs are continuing to rack up massive growth, while rising interest rates are forcing several homeowners in the west to sell their properties for less than they paid several years ago.
Historically low levels of supply should be encouraging developers to invest in producing more low-cost, affordable housing – however that is unlikely to be forthcoming any time soon, according to industry forecasters BIS Shrapnel, who say a combination of poor affordability and high development costs are preventing new land subdivision production across Sydney.
Angie Zigomanis, senior project manager with BIS Shrapnel, says the rise in lot production costs, due to a number of factors, has meant that developers cannot profitably produce land at current prices, resulting in new dwelling construction in Sydney falling to levels not seen since the 1950s.
“The possibility of a further correction in prices in Sydney to meet the market is limited due to the inability of developers to profitably subdivide at current market prices for land due to rising development costs,” Zigomanis says.
“After the greenfield land cost, development costs and government charges, developers cannot make an effective margin at current values – and we expect they will elect to hold back on development until demand improves and lot prices rise sufficiently to make development viable.”
Zigomanis forecasts that lot production will increase 25% in 2008/09 from a very low base, with further increases forecast for the following two years. Land production is expected to rise to a peak of 7,000 lots by 2010/11, with outer Sydney accommodating much of the upturn in new house activity.
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