Ray White Group Chief Economist Nerida Conisbee, said the unexpected resilience in land values is reshaping how we think about housing market cycles and what it takes to deliver affordable new housing.
“Australia’s housing affordability challenge has an underlying mathematical reality: for new homes to become genuinely affordable, either construction costs must fall or land prices must drop significantly,” Ms Conisbee said.
“While construction costs are finally moderating after their pandemic surge, land prices – particularly for development sites – remain stubbornly elevated despite the sharpest interest rate rises in decades.”
Ms Conisbee said that construction costs are moving in the right direction but not quickly enough to significantly impact affordability.
“After soaring to extraordinary heights during the pandemic, building costs are finally moderating. At their peak in mid-2022, construction prices were rising by more than 25 per cent annually in some states,” she said.
“Now, most states are seeing annual increases of less than five per cent, with Victoria actually recording slight price declines.”
However, she said that “moderating” doesn’t equate to “affordable,” as construction costs remain significantly higher than pre-pandemic levels.
The more concerning issue, according to Ms Conisbee, is the persistent high prices of development sites, which traditionally would fall during periods of interest rate increases.
“An analysis of 3,864 development site sales over the past five years shows that the median development site sale price in Australia has increased from $4.8 million in 2020 to $8.5 million in 2025 – a rise of more than 75 per cent even as interest rates soared,” she said.
This unusual market behaviour stems from several factors that are slightly different the current cycle from previous downturns.
“Today’s development site owners are far better prepared than in previous cycles,” she said.
“During the unprecedented period of ultra-low interest rates from 2011 to 2022, sophisticated investors and developers built up substantial equity buffers.”
She said that many locked in long-term, low-cost funding or used hedging strategies to protect against rate rises, allowing them to weather the current storm without being forced into distressed sales.
The lending landscape has also transformed dramatically, providing property owners with more options.
“In previous cycles, property development was largely funded by traditional banks with rigid lending criteria,” she said.
“Today’s market is completely different.
“Non-bank lenders have expanded rapidly, institutional investors like superannuation funds are active in property development, and foreign investment provides additional capital sources.”
This situation creates significant challenges for housing affordability and frustration for developers.
“Developers are caught between land prices that won’t fall and construction costs that remain elevated, making it difficult to deliver housing that buyers can afford,” she said.
“It’s a circular problem: developers can’t start projects because the numbers don’t work, which means less housing supply, which keeps prices high.”
While acknowledging that a more stable, well-capitalised property sector with diverse funding sources is generally healthier than one prone to boom-bust cycles, Ms Conisbee said this stability comes with trade-offs.
“Without these natural pressure valves, finding pathways to affordable housing may require different approaches than simply waiting for market cycles to run their course,” she said.
