Supply and demand is the fundamental equation that underpins the pricing of any product, particularly the ones human beings rely on for survival like food and of course, shelter.
On the surface, you’d think it was as black and white as providing sufficient accommodation to house any given population, at any given time. But because this is all about the economics of human consumption and our somewhat fickle buying habits, there are of course a lot of grey areas.
We need more of both
When the amount of available housing stock outstrips buyer and tenant demand in a suburb, prices correct either sideways or downwards, depending on how severe the imbalance becomes.
Likewise, when lots of people want to live in an area, but it’s nigh on impossible to create more dwellings due to a) political and planning restrictions, b) economic or geographic constraints, or c) all of the above, competition for limited stock invariably places upward pressure on prices.
Demand can rise and fall on the back of any number of fundamentals, including things like industry and employment and increasingly in recent times, lifestyle trends.
And now, as the doors to sub-sectors of Australia’s property markets are literally swung open for droves of cashed up foreign investors, trying to solve Australia’s supply and demand equation is like pondering Einstein’s theory of relativity.
The fact is…we seemingly need more of both. More supply in the form of affordable accommodation for a population that’s projected to reach 40 million by 2056, and continuing sustained buyer activity (foreign or otherwise) due to the country’s economic reliance on real estate; at least until a viable alternative presents itself.
You can see the dilemma here. How do you manage to achieve both in balance?
High-density dilemmas
This is a conundrum we’re seeing played out in select pockets of Sydney and Melbourne right now, where the alleged property bubble kicked off in earnest as CBD employment opportunities grew in the first instance, closely followed by an escalation in demand for commutable accommodation.
Being that much of the demand was for affordable options, most of those moving into the inner urban enclaves became tenants and in turn, yield-chasing investors were attracted to these inner city markets as rents started to rise.
What resulted was a feeding frenzy, as foreign and local property investors fought to snap up tomorrow’s real estate assets at today’s prices, in the form of what has arguably become Australia’s largest off the plan apartment construction boom in history.
Now, as masses of supply start to spill forth from the development pipeline across Sydney and Melbourne in particular, we’re seeing more options opening up to tenants and in turn, a relative flat lining of rents.
But as growing numbers of young people seek out the convenience of commutable, inner city living close to emerging employment opportunities, it’s fair to say demand will be ongoing in these areas, causing any oversupply to be absorbed relatively quickly.
Additionally, planning agendas always account for existing infrastructure hubs first, in order to reduce the cost burden of creating new amenity with the expansion of urban growth corridors.
In other words, planning authorities will likely continue to support vertical development in the form of higher density, inner city dwellings, in preference to gobbling up designated Greenfield areas.
Add to this an increasing focus on convenient and low maintenance inner city living among the young professional demographic, and it’s easy to see where market demand is heading in the future.
If you plan on residing in one of Australia’s major city centres, you’d best like the sound of construction, because it’s likely you’ll be living among an avalanche of high-density developments for the foreseeable future anyway.
Did you know…?
If you’re at all wondering what industry insiders think about all the talk of supply and demand imbalances blowing unsustainable housing bubbles, then wonder no more…
Here are some interesting findings from the 34th Property Directions Survey – an industry based group comprising valuers, fund managers, property analysts and financiers.
- Is Sydney residential property in or entering a bubble? 58% say yes.
- What about Melbourne? 53% feel Melbourne is in the same bubble territory as Sydney.
- Brisbane then? Nope, 70% are adamant that Brisbane has avoided bubble trouble.
- Will Sydney and Melbourne’s property prices continue rising for the next 6 to 12 months? 53% said yes for Sydney, while an overwhelming 76% believe the Melbourne market will keep on keeping on.
- Where do you think Melbourne, Sydney and Brisbane will sit in the property cycle as we enter 2016? Sydney will peak in 2016, Melbourne will have passed the top of its peak in 2016 and is expected to remain up around there into 2017, while Brisbane will be just nearing he top of its cycle.
- Are interest rates a significant driver of residential property demand in Sydney? 100% of respondents say absolutely, while 95% also suggest foreign investment is very significant.
- Will interest rates and inflation remain similar for next year? Most say yes, and suggest we’ll see higher movements in the next three years.
- Will foreign investment continue at the same rate? A small majority believes levels will be sustained over the next 6 months, but the certainty surrounding foreign investment activity drops away over the next 12 to 24 months.
- What are some of the emerging factors that you believe could impact Australia’s property markets into the future? A slowing Chinese economy, increase in unemployment levels and potential changes to foreign investment or immigration rules were all listed as possible influencers.
If you would like more insider perspectives on the current state of play for Australia’s major city property markets, why not contact us here at Trilogy?
With decades of combined market knowledge and a team that has years of personal experience in property investment, we can give you an unfair advantage over the competition and potentially boost your serviceability ceiling and investment capacity. Just click here to connect with us today.
About the Author
Since 2008, David Thomas has built a business aimed at servicing the needs of property investors, owner occupiers and small business owners. David is recognised as one of the top 10 independent mortgage brokerages in the country, David and his team have settled almost billions of dollars worth of residential and investment loans over the last decade.
Known for his straightforward, relatable style, David believes by educating people about property funding; they fare better in the market. By sharing his expertise openly, some of the people he educates will likely become his clients. It's a win-win approach.
David Thomas is a credit representative (Representative Number 506153) of BLSSA Pty Ltd, ACN 117 651 760 (Australian Credit Licence 391237).