Adelaide Developers Go ‘All In’ on House and Land

Struggling developers in Adelaide are going ‘all in’ to sell their house and land packages. Despite historically low interest rates, attractive government grants and developer incentives, Adelaide developers are still scrapping to get sales. Looking back at previous market cycles in the property industry, if such incentives were available property prices would be doubling every three years and everyone would be buying into the property market.  

Many people ask the valid question of why developers simply don’t drop their prices to move stock. To answer this question it is important to understand how a developer maintains profitability. A developer usually buys a site and builds the project in stages, which leads to a constant pipeline and maintenance of cheaper rates with contractors. Reducing the price could potentially lead to a devaluation of later stages, can cause a devaluation of land in the surrounding area that the developer most likely has an interest in, and could signal a price war with competing developers. Most importantly, it seems that consumers respond to free things rather than a reduction in price.

As developers expand their business they build lucrative contracts with suppliers to maintain cheap rates for building material and labour. If the developer sustains a constant pace of development they can keep costs low via the comparative advantage of bulk buying. However, a drop in sales means a build up of stock, with a consequent slow down in the rate of development needed. Over-building to maintain low costs could push the developers into high leverage situations and risk liquidity problems.  

In order to get quick sales to maintain production and retain original prices developers offer incentives to buyers. In Adelaide, Dechellis Homes and Rossdale Homes are offering customers $10,000 towards their new home, and people who sign up with Sekisui House Australia can pay an extra $999 to receive a 2013 Mitsbuishi Mirage valued at $14,000 or a Japanese holiday valued at $11,690. Fairmont Homes is throwing in free evaporative air-conditioning with their homes.

To offer low cost, property-related incentives such as rental guarantees or stamp duty concessions is ok on good quality stock as long there is natural demand for the property. However, things get out of hand with the level of incentives if the developer is building stock that the market has little demand for. Looking at RP Data sales data over a 10 year period, the average size of a new house and land block has shrunk by almost 50% in Adelaide.  

The Adelaide market can’t be fixed by using short term inflated incentives to fix a structural problem in the industry. The only way for the Adelaide market to recover from a fall in sales is to either drop prices or increase land sizes.