Australia's housing bubble is a land bubble: A closer look at the rising costs and their impact on the housing market
The Australian housing market is experiencing a significant bubble, but it's not just about the houses themselves. It's primarily a land bubble, with the value of residential land skyrocketing and becoming a major barrier to homeownership. Here's a breakdown of the latest data and its implications.
Skyrocketing Land Values:
The Australian Bureau of Statistics (ABS) revealed that the total value of residential land in Australia hit a record high of $8.3 trillion during the 2024-25 financial year, a staggering 7.0% increase. This is a dramatic shift from 1989 when land values were just 1.1 times GDP. By 2024-25, they had soared to 3.0 times GDP.
Land's Dominance in Housing:
The proportion of land in Australia's housing stock has risen dramatically. In 1990-91, land accounted for 54% of the housing stock. By 2024-25, this had climbed to a staggering 75%. This means that the value of land is now significantly more influential in determining the overall value of housing.
The Rising Cost of Land:
New data from Cotality and the Housing Industry Association (HIA) paints a concerning picture. Nationally, lot prices are rising at an alarming rate of over $200 per day. In the 2024-25 financial year alone, median lot values rose by a substantial 6.8%. This trend is even more pronounced in capital cities, with prices surging across the board:
- Greater Sydney: $314,350 (84%) increase
- Greater Melbourne: $163,700 (75%) increase
- Greater Brisbane: $189,400 (90%) increase
- Greater Adelaide: $105,500 (57%) increase
- Greater Perth: $125,000 (50%) increase
- Greater Hobart: $190,000 (146%) increase
Shrinking Blocks, Rising Prices:
The situation is even more dire when considering the price per square meter. Despite smaller block sizes, land prices have skyrocketed. For example, in Greater Sydney, the price per square meter increased by a staggering 126%.
The Impact on Homebuilding:
HIA chief economist Tim Reardon highlights a crucial point: strong population growth is driving increased homebuilding activity, but it's also fueling rapid land price increases. This double-edged sword creates a significant barrier for Australia's growing population, making it harder to build affordable homes.
Economic Implications:
This land inflation has a profound economic impact. It shifts the aggregate supply curve to the left, reducing the capacity to build dwellings at any price point. This means that even if developers want to build more homes, the rising land costs make it financially unfeasible.
Government's Role:
The federal government's response is crucial. Instead of addressing the issue by reducing immigration, they've chosen to increase it to record levels, driven by international students. This only exacerbates the housing shortage. Abul Rizvi's forecast predicts an average net overseas migration of 300,000 under current policies, leading to a worsening structural housing crisis.
The Way Forward:
To address this land bubble, Australia needs a multi-faceted approach. This includes rethinking immigration policies, incentivizing denser housing development, and exploring innovative solutions like modular construction. The current situation is unsustainable and threatens to leave many Australians without affordable housing.
