CRICOS No J a university for the world real R 16 th PRRES Conference Wellington, New Zealand, January, 2010 Constraints to Cost Effective Land Supply Lyndall Bryant Queensland University of Technology Brisbane, Australia

CRICOS No J a university for the world real R Overview Introduction Research Premise Land Supply Equation Supply Side Cost Variables Findings and Conclusions

CRICOS No J a university for the world real R Introduction Initial scoping paper SEQ Regional Plan 2.6% population growth Supply is limited despite land availability Housing affordability falling Developer pays/cost recovery infrastructure charge policy framework

CRICOS No J a university for the world real R Research Premise Policy aim is to smooth boom and bust cycles Supply = Demand ie. Market Equilibrium Equilibrium price = affordability level = market value Price is determined by macro factors eg. Interest rates, employment The challenge for the developer is to supply product to the market at that price point. Supply is constrained when the costs of production exceed that price point Market is in disequilibrium (boom/bust)

CRICOS No J a university for the world real R Equilibrium Price = Affordability Source: Trumpuniversity.com

CRICOS No J a university for the world real R Land Supply Equation (Lc + Dc 1 - n ) x (1 + Di) = GR Where: Lc=Land Cost Dc 1 – n =Development Costs Di=Development Margin GR=Gross Realisation

Queensland University of Technology CRICOS No J = For house prices to be at an equilibrium level, the sum of the supply side costs must not exceed the equilibrium price. Land Cost Develop- ment Costs Develop- ment Margin Equilibrium Price Market Value Affordability Level Land Cost Develop- ment Costs Develop- ment Margin

CRICOS No J a university for the world real R Development Margin Forecast profitability rate upon which to base investment decisions Often omitted by policy makers’ equations Constraining effects: –Risk:Return judgment call –Elect to invest capital elsewhere –Inability to obtain finance  Appropriate margin?  Inability to obtain finance Land Cost Develop- ment Costs Develop- ment Margin

CRICOS No J a university for the world real R Endless list … $$$ Developer funded infrastructure provision tied to development approvals Constraining effects: –Long approval periods –High infrastructure charges (unable to be accurately forecast at acquisition) –Increased holding costs over extended approval periods  Effective infrastructure funding model Land Cost Develop- ment Costs Develop- ment Margin Development Costs

CRICOS No J a university for the world real R Most elastic input (pre- acquisition) Vendor expectations based on historical evidence ++ Constraining effects: –Redevelopment value of land drops as other costs increase –Unmotivated vendors hold out for higher prices –Highest and best use of sites does not match density targets  Joint venture models? Land Cost Develop- ment Costs Develop- ment Margin Land Cost

CRICOS No J a university for the world real R Costs = Prices = Affordability Demand Equilibrium Increased costs P1P1 P2P2 Price Increase Quantity Price Reduced Supply Q1Q1 Q2Q2

CRICOS No J a university for the world real R Key Constraints to Cost Effective Land Supply in SEQ Developer expectations of return/effective pricing of risk Inability to obtain development finance High (and unpredictable) infrastructure costs Vendor unwillingness to accept lower land values

CRICOS No J a university for the world real R Summary Introduction Research Premise Land Supply Equation Supply Side Cost Variables Findings/Conclusion Questions and Comments...