How the Big Developers Are Making Large Profits

How the Big Developers Are Making Large Profits

Well, who would’ve thought it?

Big developers supposedly in the business of making a profit from building homes are in fact making more money withholding their landbanks from sale.

Over the past 10 years, the increase in land prices from this drip-feed is assessed to have cost home buyers some $5.9 billion nationwide.

The findings come from a new report by Prosper Australia.

26,000 sales in nine master-planned communities were assessed by Director of Advocacy Karl Fitzgerald and Dr Cameron Murray.

From 110,000 approved, rezoned sites released to developers nationally over an average of 9.5 years by government — only 26,000 (less than a quarter) have been taken to market and sold to aspiring home buyers.

Why?

Developers claim that it’s to do with planning red tape.

No doubt that plays into it.

Having delt with more than a few councils myself over the years, I know it can take three-times longer, in some circumstances, to gain approval for a suburban house than to build it!

Taxes, development charges, and infrastructure funding all play into the feasibility.

But let’s not be blind here.

Developers will only build if there’s a healthy profit to be had.

And findings in the report show there’s a fair bit of market manipulation going on.

Sites in new estates are drip fed onto the market in ‘staged releases’ to keep prices elevated.

Buyers pay a premium.

Supply is increased when the economy is bubbling along — yet there’s a sharp reversal in supply when prices are falling:

Developers get a rezoning of say 10/20 thousands lots and in one particular development.

I’ve been following called Manor Lakes here in the west of Melbourne, it’s up to stage 173C!

And so they drip feed out little lots of land even though they’ve got thousands of lots and each time they release them, it appears to be that the prices keep etching UP!

We’re concerned that no one is actually looking at this process and its impact on pricing.

Prices are on the up, the days on the market are falling all those sorts of metrics feed into their (developers) algorithms…

The concern we have is that the banking industry really makes it difficult for developers to reduce prices when the market does soften. 

Because if developers drop the price of land, the banks have to write down the value of their loan book and that affects the amount of credit they can create.

Director of Advocacy Karl Fitzgerald,
Prosper Australia

Simply put, it doesn’t matter how much land is released and rezoned by government, the beneficiary will never be the home buyer.

The price of land in the new estates on the outskirts of the cities is controlled by the large developers.

It’s not designed to be affordable housing.

If this were the intention — government could purchase land at a margin above agricultural value, rezone it, and sell direct to the consumer.

This process is common in other areas of the globe — such as Germany.

In Australia, the market is rigged to ensure land prices don’t fall substantially.

And the findings in this report is one reason I’ve been warning investors off buying land and new housing in development estates for donkeys’ years.

The drip-feed of supply — whilst keeping prices elevated — also dilutes the price of existing homes constructed in the preceding years.

Significant land appreciation (such as we get in the capital cities in the bullish phase of the real estate cycle) cannot occur until all the land in a new estate has been sold and built out.

From that point, continued population growth requires councils to provide additional infrastructure to accommodate the surge.

The construction of a new train station or road, for example, will finally see profits flow to existing land holders.

But this is a process that can take many years.

Until such a time, the only beneficiaries from sales in new estates are the big developers.

You can read more here.

Sincerely,


Catherine Cashmore Signature

Catherine Cashmore,
Editor, The Daily Reckoning Australia