Australia’s Shrinking Lot Sizes — What It Means for You as an Investor

Australia’s Shrinking Lot Sizes — What It Means for You as an Investor

News reported yesterday (paywall) that developers are crunching lot sizes in Melbourne and Geelong housing estates to ensure new homes in the outer suburbs ‘remain affordable’ for first home buyers.

According to greenfield land sales specialist Red23, the traditional 400 square metre (sqm) lot size has been replaced by a skinnier one, around 350sqm.

Melbourne lot sizes have shrunk 3% to 388sqm in 24 months.

In Greater Geelong the shrink is even larger.

Sizes have dropped 17% over the same period — now sitting at an average of 400sqm.

The motivation to improve housing affordability could sound plausible considering rising construction costs.

Except the reduced lot sizes have not made housing in new estates affordable.

Prices continue to rise.

There’s been a greenfield land boom driven by PM Scott Morrison’s ‘HomeBuilder’ program (which was also sold under the vice of assisting affordability).

According to Melbourne’s Planning Authority, greenfield sales have more than tripled in outer Melbourne.

That’s led by Mitchell Shire, which has had a 375% increase in sales year-on-year.

No doubt, the big developers are reaping a windfall under the state and federal government’s ‘COVID recovery’ plans.

Policies that are churning money into the property market via buyer grants and so forth.

The ideal scenario for these big developers is to buy cow paddocks ahead of rezoning and sit on the sites for a few years while the city and infrastructure develop around it.

Then once they have an approved subdivision plan, dribble it out to the market, lot by lot in what is known as ‘stage releases’ to keep supply constrained and prices high.

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They chop the lot sizes down to the minimum to maximise profits.

They build to the boundary to entice first home buyers wanting something that looks flashy, sizeable, and new.

Once those sites have sold — another stage opens.

Rinse, repeat.

It couldn’t be a worse investment for the naïve first home buyer.

The properties are generally poor quality and depreciate fast.

The biggest developers are listed on the share market (LendLease, Mirvac, Stockland, etc).

These are a minority of developers overall, but their behaviour is publicly visible.

This allowed the team at Prosper to conduct studies a few years ago, looking at how much land they are actually sitting on at any one time.

Some of those studies revealed the land banks hoarded by the biggest developers could sum to an average of 18.4 years.

In one large estate, the team at Prosper investigated for the current Inquiry Into Housing Affordability & Supply. This ‘drip feed’ practice gifted a premium of $137 million off 2,131 dwellings over six years.

It makes a farse of any call to the government to increase land supply to help housing unaffordability.

Newly rezoned supply reaching the market is controlled by developers for profit, not governments.

And let’s face it.

The truth is that politicians have no intention of making housing ‘affordable’.

To do so, land prices must fall.

The only way to make land prices fall is to strip speculation out of the market.

The best way to do that is with a hefty land tax.

Yet, with banks lending 60–80% of their loan book against land value as collateral — it won’t happen.

If you want to play the game of land banking yourself, steer clear of the new estates.

The only land sites that are truly decreasing in supply are the old 600sqm-plus plots of land with an old suburban house on top, in the middle ring suburbs of the major cities and towns.

Many of these are being chopped up as well by local, smaller developers.

So if you can secure land in an area where this is occurring, the investment will perform well for the remainder of the cycle.

You don’t need a fortune to secure one I might add.

You simply need to purchase in one of the regional towns that’s attracting an influx of population growth fleeing the inner-city draconian COVID restrictions.

I also expect many unvaccinated workers will be heading into regions where vaccine passports are not relevant — Canberra, and in time, also NSW. This has happened overseas.

This trend is going to continue for a while yet.

Buy an older suburban house on a well-located subdividable lot of land — and enjoy your own land banking windfall.

Best wishes,

Catherine Cashmore Signature

Catherine Cashmore,
Editor, The Daily Reckoning Australia

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