RE-SELLING OF VACANT LAND BECAME A KEY FEATURE OF THE MARKET DURING THE PERIOD OF STRONG PRICE GROWTH IN 2003 TO 2006, BUT SINCE THIS TIME THE RETURN ON SPECULATIVE LAND PURCHASES HAS CONSIDERABLY DECLINED.
Land speculation is a risky investment but when the Perth residential land market was experiencing strong demand and price growth between 2003 and 2006 speculative purchasing of vacant land became a key feature. The reselling of vacant lots increased from around 10 to 12 per cent of all lot sales in 2003/04 to 25 per cent in late 2006.
During this period of strong growth it was not uncommon to hear of speculators holding onto land for barely 12 months and making substantial profits. But in the last five years reselling has subsequently become less prominent in Western Australia as the median return to speculators has fallen dramatically from more than 25 per cent per annum in 2007 to less than 5 per cent per annum in 2011.
Although transaction costs (i.e. stamp duty, selling fees, etc.) generally discourage speculative investment in residential land, it was seen as an attractive investment during the 2003-2006 period of rapid price growth. Many of these speculators who on-sold their land before 2007 experienced capital growth in excess of transaction costs and produced a hefty profit that would have rivalled alternative investments such as shares and established properties.
Indeed, strong demand for vacant land during this period drove median prices to extraordinary highs. In Perth, the median price of vacant land increased by 116 per cent between 2003/04 and 2006/07, a growth rate of 14 per cent per annum.
As the price of land increased during this heady period, reselling played a bigger and bigger part. Lot resales from 2005 to late 2006 grew faster than the increase in new vacant land sales and consequently had an exacerbating effect on price growth.
Figure 1 – Lot resales and median price, Perth metro (source: WAPC, Perth and Peel Development Outlook 2011/12)
Speculating in a subdued market
However, the land market is significantly different today. Transaction volumes are far below 2006 highs, and median land values in Perth are still below the 2007 peak despite wages increasing more than 23 per cent since 2007.
Given relatively subdued turnover, no growth in median land prices and few prospects of capital growth returning to these highs, it should be of little surprise that the reselling (or on-selling) of vacant residential land has become less prominent in Perth.
In the Perth metropolitan market, lot reselling fell from around 25 per cent of all vacant land sales in late 2007 to under 15 per cent in 2011, broadly following the fall in the median price of vacant land.
Figure 2 – Lot resales and median price, Perth metro (source: Landgate, UDIA calculations)
The aggregate value of resales picked up in late 2008 and throughout 2009 as many speculators took advantage of increased demand driven by the Federal Government’s temporary First Home Owner Grant Boost. However, resales levels subsequently fell to around 100 per month in 2011 – half the mid-2009 highs.
Selling at a loss
A look at the difference between purchase and selling prices reveals that the median capital gain in late 2007 was still a reasonably strong 25 to 30 per cent per annum, but in subsequent years the median fell to under five per cent – and in the second half of 2011 the median gain fell to between zero and three per cent.
Figure 3 – Resales volumes and median capital gain (annualised), Perth metro (source: Landgate, UDIA calculations)
Given that the median price of vacant land in Perth has remained flat since 2009, speculators who held onto their vacant lots waiting for demand (and prices) to rebound have realised worsening ‘profits’. Over a third (35 per cent) of vacant land resold in Perth during 2011 was sold for less than the original purchase price, up from 22 per cent in 2010.
Waiting for boom mark II
Throughout 2005 to 2007, there were numerous incidences of speculators holding onto land for as little as six months and making a healthy gain. However, as demand eased the median holding time of 1.4 years (17 months) in mid-2007 increased to 3.5 years in late 2009 (the end of the FHOG Boost). That is, the majority of resales throughout mid-2007 and late 2009 were of vacant land originally purchased pre-June 2007.
Meanwhile, and perhaps surprisingly, many land resales in the last few years were of land originally purchased after the 2003-2006 boom. The majority (52 per cent) of resales in 2011 and 2010 were for land originally purchased post-June 2007. Indeed, 25 per cent of resales in 2010 and 2011 were of vacant lots held for less than 15 months. (In part, a portion of these sales may not be attributable to speculative activity, rather changed circumstances of owners who originally intended to build.)
Figure 4 – Median, upper and lower quartile hold times, land resales, Perth metro (source: Landgate, UDIA calculations)
While speculative activity in the Perth land market has eased, it remains still a significant part of the market. With demand for vacant land strengthening, there may be many speculators still holding onto blocks waiting for another period of strong demand and price growth.
N.B.
This article analyses speculative activity in Western Australia by drawing on historical land sales activity for the period July 1, 2007 to December 31, 2011. Data includes all lots that have been settled as of November 14, 2012.
Throughout this report, ‘lot resales’ refer to vacant residential land that has been purchased and subsequently on-sold without construction. Therefore, the report does not capture speculative land activity if the land has not been on-sold as of December 31, 2011. This analysis is particularly concerned with developed urban land speculation, rather than land banking by developers or other holders of rural or urban zoned land.
Thank you to Landgate, Western Australia’s land information provider, for providing the data.