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Is there hope for Greenfield developments amidst the rising housing tax?

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There are two surprisingly contradictory things happening in the Australian real estate industry – the sales of residential land are falling significantly, but the prices being paid by existing players are still rising.

What does this honestly mean? Does this reveal that Australia no longer follows the market forces of demand and supply? The answer to this puzzle lies deeply in the affordability discussion. And you might have picked a clue in an announcement made in February where a decision was reached to increase the cost of new houses and new land packages in the city of Sydney by over $50,000.

Greenfield estate futures

Greenfield estates were meant to serve the family housing market by providing affordable detached family housing for Australians. Such areas typically undergo rapid development and population growth.

Prior to new developments, the areas are characterised by little to no population. Initially, the attractiveness of such housing arrangements lied in the lower price point for house and land package with a possibility of saving on stamp duty.

Falling residential land sales

In the last quarter, Greenfield sales dropped by 30%, according to the Urban Development Institute of Australia. In the first quarter of 2018, the sales averaged at 610 per month, which is the lowest figure since 2012.

Mr Mann, who is the UDIA NSW chief executive, said the market is likely to undergo a ‘cliff fall’ in the next 12 to 18 months if no action is taken to salvage the situation.

The increased cost of a new home

The primary problem facing residential land sales is the price of residential allotments and new dwellings. The cost of creating new shovel-ready land is steadily rising and consequently the rise of homes built there.

The Australian reported on February 19 that house prices on Greenfield sites could rise by as much as $50,000 in Sydney. This follows a decision by the NSW government to uncap infrastructure levies on developers.

Land tax is a major holding cost for developers. While these developers seek and find approvals for the state and council, construct the residential properties and hold the lots as they wait for buyers, they still pay land tax to the State Government.

Unfortunately for home buyers, holding costs are included in the final cost for such a project to be viable. Greenfield residential developers estimate that the extra land tax they have to folk out will translate to an additional $800 to $1,000 cost for home buyers.

Where’s the transparency?

This situation has allowed room for an unclear nexus between benefits and costs. Who pays for what and where the money goes is also a primary concern with infrastructure fees.

The ballooning cost of new residential land is at the heart of Australia’s housing affordability crisis. And this is a problem that cuts across nations. Each time a state government tries to cut its annual budget, housing affordability is affected by the newly introduced charges, taxes and fees.

The latest Residential Land Report released by the Housing Industry Association reveals that the median lot price in Sydney is almost four times that in Hobart, double those in Adelaide and Brisbane and 55% higher than in Melbourne.

Greenfield sales have dropped not because of a likely decline in demand but because of lower supply. This shortage coupled with the rising state-imposed taxes means overall costs will continue to rise relentlessly.

A sigh of relief

Despite the super-heated market especially in NSW, mortgage arrears are still low. According to Westpac’s findings, NSW has the lowest rates nationally at 0.8%. Non-bank home loan lenders are luckily easing the pressure for new home buyers. Such private lenders offer flexible rates and fees for home loans.