The Role Of Supply Vs Demand In Property Investing

Supply vs demand is a basic economic principle that outlines that the quantity of a good varies inversely with its price. That is to say, as the supply of a product increases the demand for that product decreases. You can see this principle throughout everyday life during the transaction of any product or service. In an open market, when a good’s supply increases it means it becomes more readily available and thus loses its value due to its accessibility. Likewise, the short supply of an item will increase demand and thus raises its value. Notice the quantity of the good changed the supply vs demand. This can also take place when the quantity remains the same but the number of prospective buyers changes.

Supply Vs Demand In Property

Within the property market, this principle is evident. As the supply vs demand for a property is what dictates price. In this case, supply refers to the number of properties on the market while demand encompasses the potential pool of property buyers. A market in which there is minimal supply will increase demand and subsequently see buyers pay more money to acquire a property. The same applies in the opposing circumstance, where a large supply with minimal demand will likely result in a price decline. Both metrics can be considered at each end of an economic lever where the equilibrium dictates a property’s value.

What Influences Supply Vs Demand?

There is a range of variables that influence the supply vs demand of a property. With each component having a varying level of influence on the supply vs demand. From a demand point of view, things to consider would be the property’s affordability and desirability while interest rates and lending restrictions also have their impact. While supply is dictated by the number of available properties on the market with new builds adding to this pool of potential properties.

External

There are numerous variables that externally influence the supply vs demand of a property market. This is because the property market is not solely an “open market”. An open market is when there are no restrictions to buyers or sellers in the purchasing of goods. In the property market, there are numerous external variables that influence both the buyer and seller. This subsequently impacts the movement of property prices.

For example, during an economic downturn, the government utilises lower interest rates and looser lending restrictions to stimulate the economy and promote property transactions. Changes to interest rates influence property owners’ ability to hold onto a property. So reducing rates makes it more affordable for property buyers. A similar narrative takes place with lending restrictions. The easing of restrictions allows higher borrowing which influences the price people are willing to pay for a property. Subsequently, increased rates and tighter restrictions suppress buyers and their purchasing power. When each of these economic levers is pushed or pull we seen price expansion or contraction. Although, despite their impact, they provide the same leveled playing field for all buyers at any one given time.

Internal

Likewise, there are also internal influences that influence the demand for a property. The affordability of a suburb influences whether the price of properties is seen as under or overvalued. If a suburb is undervalued compared to its neighbouring suburbs buyers may choose to purchase, there instead. This is known as the “ripple effect” where buyers see greater value in cheaper suburbs if they provide more affordability. This may be why we don’t see huge discrepancies in prices across surrounding suburbs. Of course, price values are varied between suburbs but it would be highly unlikely to see an area where it is half the price of its neigbour. This may also be why historically we have seen property prices move back towards the national average growth rate. As affordability dictates the growth potential of a suburb and can even promote property prices in undesirable areas.

The desirability of a location drives people to want to live or invest in an area. This can include things like distance to key infrastructure and lifestyle. The perception of an area creates stigmas that influence an individual’s willingness to purchase within an area. The desirability across different locations influences the demand for property in that area. More affluent areas that have greater amenities and lifestyle factors become more desirable. This influences the market’s perception and drives demand, particularly for owner-occupiers.

How To Determine A Location’s Demand?

Without knowing the weight to which each variable influences supply vs demand, how can the demand of a property be identified? There are multiple tools that you can use to research and determine the supply vs demand of a suburb. These tools are extremely useful as they help to paint the picture of that area and give the buyer a greater understanding of what is happening in the market.

Note, supply vs demand changes from suburb to suburb. Just because there is one suburb that may have a high demand does not mean the suburb next to it demonstrates the same interest. Nor does one type of property reflect the same demand for all types of properties. Desirability, affordability, and density may dictate which asset type is preferred in certain locations.

The Verdict

Supply vs demand is a key indicator in determining the property price in any given market. The property market utilises this concept to dictate price. When researching a particular area or suburb it is important to identify the supply vs demand for a particular property. In doing so an investor can put themselves in the best position to purchase a quality investment.

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