How Lack Of Development Is Impacting Our Local Property Market

September 8th, 2023 - by Brad Gillespie

In the 12 months to April 2023, roughly 174,000 new dwellings were approved for construction across Australia.

Just 142 of them were in Sydney’s inner city.

While some residents may celebrate this lack of development, a shortage of new housing can have negative consequences, making it harder for people to find somewhere to live. We explore exactly the many implications of low development levels in Sydney’s inner city and inner west.

Why are so few new properties being built?

New development requires a few ingredients, but the most important is having land on which to build. One of the key features of Sydney’s property market over the past 12 months or so has been a lack of development sites coming to market.

But more than that, there has perhaps been a lack of willingness for existing site owners to develop the properties they already hold. And this comes down to two main factors. The first is that rising interest rates have made some developers less confident that their properties will ultimately be sold. The second, and perhaps even more important factor, is that rising construction costs (and a lack of available trades) have made it more difficult to turn a profit.

In fact, since late 2020, building costs have been rising by more than 10% a year, according to ABS data. That’s enough to throw developers’ budgeting out altogether and make many viable projects suddenly unviable. It also means many developers have decided not to proceed with projects that were in their pipeline.

The good news is that while construction costs continue to rise, the pace of growth has slowed to its lowest level in almost three years - with input costs lifting just 0.3% in Sydney over the June quarter. This could mean that the current cycle is finally breaking.

What is happening to the housing market?

Property prices are set by the laws of supply and demand. When fewer houses come to market, it means supply falls. So, if demand stays the same, sales prices naturally rise. If demand rises, prices rise even faster.

If demand falls, lack of supply can have a cushioning effect so that prices don’t fall as sharply as they otherwise would.

Here in our area, which is popular with first-home buyers and investors, we saw rising interest rate rises dampen demand over the past 12 months. However, low stock levels meant prices didn’t fall as sharply as in many other places.

As interest rates now have stabilised and confidence has returned to the market, we expect low stock levels to mean prices could rise more quickly than they otherwise would.

Where we’ve really seen a lack of development have an impact, though, is on the rental market. That’s because a high proportion of new housing tends to be bought by investors, who then let it out. With Sydney’s population rapidly growing and rental properties in demand, a lack of new stock has sent rental prices to new heights.

For instance, the median asking rent in Alexandria has risen 16.5% over just the past year, according to SQM Research.

What does the future hold for development in Sydney’s inner city and inner west?

With construction costs easing, interest rates stabilising, and Sydney’s population increasing, it’s likely that many developers holding onto sites will begin construction.

That said, while some of these may be sold off-the-plan, it will take some time for most new properties to come online.

In the meantime, we’re likely to see the imbalance between supply and demand continue. That means the potential for price rises, as well as a continued tight rental market.

That means, if you’re looking to buy a property in Sydney’s inner city or inner west, now could be a very good time to get into the market.

Want more?

If you’re thinking of buying or selling in Sydney’s inner city and inner west, get in touch.