Land prices reach for the sky

All eyes have been on escalating house prices in recent years, but land prices have climbed to new heights too, finds Miriam Bell.

The cost of the land is a key component in the price of a home, and when land to build on is scarce, or in high demand, it puts pressure on prices. To avoid this, growing cities need a responsive supply of suitable land to build on.

But that has not been the case in New Zealand over the last few decades.

Reserve Bank Governor Adrian Orr says restrictive land zoning, tight planning rules, lack of public infrastructure for new developments, and complex consenting processes have contributed to an unresponsive supply of land.

‘‘As a result, any increase in demand for housing typically pushes up the price of developable land and this pushes up house prices.’’

Land now accounts for 60 per cent of a median house price, compared to 40 per cent five years ago, which reflects the constraints on land availability, the bank says in its latest financial stability report.

But have land prices gone up to the same degree as house prices? House price figures are readily available but it is harder to get a gauge on land prices and their movement.

New Real Estate Institute figures show the median residential section sale prices in the main urban centres for the three months ending October, but they do not account for section size or the cost per square metre.

They show Auckland sections had the highest median sale price at $742,500, and Dunedin sections had the lowest at $295,000. In between, and in a similar price bracket, were Tauranga ($479,130), Christchurch ($451,087), Hamilton ($428,000) and Wellington ($390,000).

Real Estate Institute chief executive Jen Baird says the cost of city sections depends on the city, proximity to the CBD or views, and the section size.

The availability of land and increased demand will affect the value, and the price of residential sections has increased, she says.

‘‘When we look at section prices compared to the same time last year, we can see price growth in all areas, with only Hamilton showing a comparative decrease [of 6 per cent].

‘‘Christchurch city has seen the most significant increase in section prices over the past year, with a 78 per cent increase, although it remains attractive for its affordability.’’

All the cities had an increase in section prices over the past five years, but Wellington recorded the biggest at 129 per cent, she said.

The rising trend evident in the institute’s figures is supported by CoreLogic analysis of the median price per square metre paid for vacant sections in the territorial authorities of the six main centres in 2011, 2016 and this year.

Section prices have gone up everywhere over the past 10 years, and this year range from $2046 per sqm in the central Auckland area to $332 in Selwyn District (Christchurch). They were highest in the Auckland districts, while the lowest were Selwyn, Waimakariri District ($369) and Dunedin ($396).

Outside Auckland, the highest square metre cost is Wellington City with $1200. It was up from $461 five years ago, the biggest increase of all areas over that time.

CoreLogic head of research Nick Goodall says the prices paid over time follow a similar trajectory to the broader market, with post-GFC growth in Auckland from 2011, followed a few years later by the other centres.

In Christchurch and its surrounds, growth has been relatively muted due to a significant increase in available land. Section prices in Wellington took off in the past few years, leading to them doubling in the city’s new ratings valuations, he says.

‘‘But some parts of Auckland, including North Shore, Waitakere and Manukau, peaked in price per sqm around five years ago. While their prices remain comparatively high this year, they are lower than they were five years ago.’’

This could be the impact of Auckland’s Unitary Plan, which came into effect in late 2016, Goodall says. ‘‘It allows for greater density of housing and smarter use of land. It may be more cost-effective to use existing sites and this may affect demand for vacant sites, and their prices.’’

Smaller section sizes could also be a factor in the easing of prices. Infometrics chief forecaster Gareth Keirnan says in many parts of Auckland a section would be about 300sqm now when a 450sqm to 600sqm section was previously the norm.

‘‘It looks like the section to price ratio has fallen, but a buyer is getting less than they previously would have. So the sale price is masking that drop in land size. There will be more of that in future with the greater densification of housing under various new rules.’’

The Government’s National Policy on Urban Development, plus its new housing densification rules for the main centres, make much more land available for development. There are differing views on the price impact.

Baird says the changes will make development easier and may push up the prices of developable land. Kiernan says it may lead to a big increase in supply and less demand, which will diminish developers’ scope to bid up land prices.

But it is Christchurch which many commentators look to as an example of how prices respond when there is a ready supply of land to build on.

Following the earthquakes, local councils collaborated to bring a large amount of land online for development around Christchurch, and in Selwyn and Waimakariri.

Construction industry adviser Mike Blackburn, from Blackburn Management, says too many homes were then built and that kept prices flat while they went mad around the rest of the country. This helped moderate demand and land prices, too.

The situation is changing though, with the cost of land increasing significantly, he says. ‘‘Eighteen months ago, around $350 per sqm was a standard cost, but many sections are now going for $550 to $600 per sqm. And, in some areas such as Prestons Park, it is closer to $1000.’’

There is a limited supply of new greenfield subdivisions as land development has not kept pace with the level of construction, and there are delays getting building consents as councils struggle to process them, he says.

‘‘At the same time, demand is running high and that is why we have seen incredible price increases for sections over the past 12 months.

‘‘The market will ease off eventually, but the fear is that once land prices have been set higher that will become the new norm.’’

The cost of city sections depends on the city, proximity to the CBD or views, and the section size. Jen Baird Real Estate Institute chief executive