Over the past 15 years or so there have been many articles about an apparent "property bubble" in Australia. Some have made very valid points, others have been pure Mary Poppins stuff.
There has been further debate this week about the role of credit in asset price inflation which cited declining populations (within towns which clearly aren't actually declining) and that most tenuous of housing market measurements, the "growth" in median prices at the suburb level.
If you were to take a moment to access a subscription sales database and track any actual property resales it would immediately become evident that typically "price growth" in small towns is merely a shift in the sales mix derived from a tiny handful of transactions.
That said, I do tend to agree that many of Australia's smaller regional cities and towns have property markets which are built upon flimsy foundations, as we will likely discover in the next couple of years as the mining construction boom turns into a capex bust.
All land is not create equal
Nonetheless the behaviour of housing markets in small towns tells us nothing useful about likely trends in large and growing capital cities.
As I looked at in more detail here previously the notion that land prices were going to deflate in Sydney was always flawed, since the incumbent system allows landbankers to drip-feed land onto the market at such a leisurely pace.
Further, where the ratio of new stock to existing stock is low, the impact of new stock on the price of existing dwelling prices is diminished.
For all that, despite what is often implied by commentary, dwelling prices have not simply kept rising inexorably in Australia.
In Sydney, for example, dwelling prices declined in 2004, 2005, 2008 and from the middle of 2010 to the middle of 2012 - three distinct downturn periods in the past decade.
But with Greater Sydney's population expected by the latest projections to explode from around 4.6 million today to approximately 8 to 9 million by around 2060, it has always seemed very likely that land values were heading higher over time.
Residential land values have risen over time
Enough theoretical discourse and back into the real world. While the total value of commercial land and rural land is not increasing at a fast rate, the aggregate value of residential land in Australia is easily set to surge to past $3.5 trillion in 2015, probably to around $4 trillion by the end of the calendar year.
Over the six financial years to June 2014 aggregate residential land values increased by 37 percent in New South Wales, by 46 percent in Victoria, by 21 percent in Queensland, by 33 percent in South Australia and by 11 percent in Western Australia, having previously already boomed in Perth.
Of course, as the population continues to expand past 23.750,000 as it did last week, as new land supply is released and developed to house the expanding headcount, and as inflation pushes the price of goods up - we do expect to see land values rising in aggregate.
However, all land is not created equal.
Some property advisors recommend investing in properties on remote regional land where demand is relatively low, and - more importantly - there are swathes of land available for release.
With the land price component of outer suburban and regional property so low, the potential for capital growth over time can be constrained.
A $200,000 outer suburban house may comprise only $50,000 of land value, so even in the unlikely event that outer suburb land values boom by 50 percent, the total value of the investment only increases by $25,000.
Why is this the case? Because outer suburban housing is readily substitutable with more fringe housing.
For obvious reasons, I believe that inner ring suburbs of capital cities will outperform over time.
As I looked at on Thursday here, capital city land prices soared by 4.7 percent to a record high over Q3 2014 to be 10 percent higher over the preceding twelve months.
There is in aggregate comparatively very little upwards pressure on regional land prices and thus they only increased marginally, and broadly in line with inflation by 0.7 percent in Q3 2014.
In its own assessment the Housing Industry Association (HIA) cited the role of chronic undersupply no fewer than six times in its one short media release, including in this short excerpt:
"There are clearly pressures building in terms of the available residential land supply.
Acute supply bottlenecks are affecting Australia's residential land market.
Sydney land it goes ballistic (supply is atrocious)
My chart packs tell me to expect that the Greater Sydney population is likely to increase by 80,000 to 90,000 persons across this financial year.
Given that this rollicking rate of population growth brings massive demand for the land within a relatively small radius of the city, as recorded on this blog over the years I have unerringly expected to see prime location Sydney land values to appreciate over time.
Well-located land supply in the present system never stood a snowball's chance of keeping pace.
Sydney land prices boom 20 percent in 2014
In this context it is no surprise therefore to note that it was land values in Sydney that really boomed in 2014 with land prices jumping by an rip-snorting 19.7 percent to $390,000.
This median price has surged well ahead of Melbourne - a city which has released greater land supply over time - at $245,000, and Brisbane at $237,950.
This 20 percent boom in land prices is the fastest annual rate of Sydney land price growth in a decade.
In some suburbs such as Kellyville land price inflation is bordering upon out of control, with prices rising 38.2 percent in 2014 alone, up to $912 per square metre.
Median prices in Glenmore Park rose by 30.6 percent, in Riverstone by 20.2 percent, and in Pitt Town 26.4 percent.
The median price of land in the south west soared by 25 percent to $350,000, while prices in Sydney's west, where lot sizes can be larger, rose by 8.3 percent to $410,500.
Extrapolating existing trends Dr. Andrew Wilson of Domain Group expects Sydney's median land prices to increase by another $40,000 in 2015 until "the chronic undersupply of residential development land is effectively addressed".
“Furthermore, the First Home Buyers grant will reduce to $10,000 from January 2016, when based on current trends, outer suburban median land prices will have increased by at least another $40,000.
It was this simple dynamic which led me to own most of my property portfolio in cities such as London *where house prices are now a ridiculous 13 times median earnings) and Sydney - and importantly, never to sell a single property when every year there are myriad predictions of dramatic market corrections - because the long term trend in prime location land values is up.
In short, supply does matter. Always.