Supply and demand is one of the most fundamental concepts of economics and the cornerstone of a market economy.
There are several indicators of property investing supply and demand within a market that you can measure and track when it comes to property investment to help with your research.
What is demand?
Demand refers to how much (quantity) of a product or service is desired by buyers.
The quantity demanded is the amount of a product consumers are willing to buy at a certain price. The relationship between price and quantity demanded is known as the demand relationship.
What is supply?
Supply represents how much the market can offer. The quantity supplied refers to the amount of a certain good (in this case real estate) vendors are willing to supply when receiving a certain price.
The correlation between price and how much of a good is supplied to the market is known as the supply relationship. Price, therefore, is a reflection of supply and demand.
How supply and demand relates to property investment
When considering the location of your next investment property, consider the supply of and demand for property in the area.
Prices of property tend to move in response to the changes of demand and supply. So for prices to rise, demand of property must exceed supply. There are many factors that can influence rising demand levels within a suburb,
- New infrastructure projects including new roads or transport routes, or extensions to existing transport routes.
- New hospitals, universities or schools.
- Owners renovating properties making them, and the suburb, more desirable.
- Private enterprise moving to an area and creating new employment opportunities.
- Improved recreational facilities, cafes, shops etc
Conversely, factors that can increase levels of supply are developers building new, high density housing, or releases of land or house and land packages.
Is it a buyers' or sellers’ market?
Demand and supply within a market has a direct impact on price.
When carrying out your property investment research, there are many factors you can consider which will help you gauge the levels of supply and demand.
- Average property days on the market - The average property days on market is the average number of days properties are advertised for sale before selling. Tracking these figures help ascertain the current supply and demand for property in a locality. Where demand for property consistently, over the long term, outstrips the available supply, prices will tend to rise.
- How long your target property has been on the market for - Real estate that is taking a long time to sell can mean a lack of demand in the locality, which in turn can lead to motivated vendors and potentially discounted prices.
- Vacancy rates - The vacancy rate is a numerical value, which which shows as a percentage how many properties are vacancy at any one time in a market. If there is an oversupply of property in a suburb, and the demand for it is low, there will be a high vacancy rate.
- Levels of property price discounting - The vendor discount is the average percentage discount from the original asking price to the final selling price. Tracking this figure within a suburb can give you an indication of the levels of buyer interest and seller motivation within that suburb. For example if the level of discount is low, it means that demand is strong, so vendors may not have to discount very much (or at all) in order to sell their property.
- Auction clearance rates (ACR) - is the proportion of properties put up for auction that actually sell. In a suburb with strong demand, a higher proportion of properties will sell at auction than in a suburb with weak demand. Get some tips for buying at auction here.
- Proportion of renters - This figure, compared to owner occupiers, indicates the supply of investment property is a suburb.
Real Estate Investar produces a free pack of Movers and Faders suburb performance reports, that can help you determine levels of supply and demand, and in particular:
- Identify suburbs experiencing strong or weak demand.
- Target areas with distressed listings that can lead to instant equity gains.
- Understand population and income trends which affect the demand and desirability of a suburb.
- Predict suburbs with future capital growth potential.
- Avoid the suburbs that could spell financial disaster.