Supply low, price high! This week we discuss supply and how it affects the overall demand for property.
Welcome to The Rentvesting Podcast – the ultimate property podcast that unpacks the facts, explains what’s really going on and challenges conventional wisdom in property. Learn how to live where you want but invest where you can afford with your hosts Louis Strange and Jayden Vecchio.
So last week we went through demand, and today we will be going through the supply side of things. Then next week will top it all off just going through how supply and demand work together, including practical examples to demonstrate how it all looks and how you can benefit from it.
So what is supply?
Louis: So it’s pretty simple. It’s how many houses are available for you to buy or how many apartments available for you to buy. So if there are a lot of appointments free, pretty good supply and that includes vacant apartments – so ones that aren’t tenanted at the moment or vacant houses. The more places that are listed for sale or basically unsold means that there’s a bit of a lull in the demand which means more supply to snap up.
Jayden: Really, an easy way to look at that is if you go on realestate.com or Domain – look at the suburb that you’re looking at buying in or renting in. Click SEARCH in the bottom and it usually says how many are on the market available and you can also find out how many in the suburb in total.
So if it’s a suburb of 2,000 units and there are 2,000 units for sale, then there’s a lot of supply. You probably have a nuclear reactor nearby, it could be Fukishima or it’s just somewhere you don’t want to live. But in that case, if there’s a lot of supply it puts pressure on prices to go lower. Whereas in the other case, if you do the search and in a suburb of 2,000 houses there’s only two for sale, there’s not a lot of supply, so then there’s a lot more competition. As a result, people will pay more.
Supply and Demand
Louis: And that’s why supply is important because if demand stays the same and supply goes up, prices will go down.
So when looking at certain areas, if there’s all of the sudden going to be 20 different developers putting in new residential places, it can often cause competition to increase. Which as supply goes up, prices will go down but if an area’s already relatively capped out, there are no additional places where you can build or there are no new parcels of land to build on, then supply is limited and prices should over time go up in those areas.
Jayden: So if there are physical constraints like in Sydney where there’s a bunch of water and you can’t build on that and there’s a big mountain range to the west, obviously there are limitations to supply and you have to go out west to Parramatta and Penrith sort of area.
What are some of the factors that influence supply?
Louis: Probably the major one is government legislation or council regulations. If they’ve got land issues or zoning issues, they’re not releasing a lot of land and that restricts the supply.
It’s a bit of a weird thing in Australia where you can look at the window in a lot of places especially if you go into suburbs you can often see a lot of parks you can see open land next to highways especially around Queensland, you don’t have to go far out of Brisbane to find a lot of open paddocks space.
That shows that there’s a lot of supply of land but if it’s not being zoned or being released to be sold by the council, then that is actually a big limiting factor of supply so if council want to have a headache and release everything that they have available there probably would be a pretty big decrease in the price of property.
Jayden: Which is why they don’t because they don’t want people to lose money because they make money from rates and all sorts of charges.
Jayden: Stamp duty which they love too. So the other factor that influences supply is when the councils do start releasing land or giving development approvals like we’ve seen in Brisbane and the supply and construction of units. A good website you can check out online yourself is RP Data.
For example, in July this year alone they were about 17,000 approvals and usually the timeframe is about 2 years from approval to construction.
Louis: What that means is in 2 years time, those 17,000 dwellings will be coming on the market.
Jayden: Which they don’t necessarily always do because sometimes developers get the approval but can’t develop it due to construction prices increasing, so it’s not hard and fast but really the current effect is if 10 years ago they were only making 1,000 of those and now they’re making 17,000 – if there’s more supply it could make prices soften out.
Louis: If demand doesn’t keep up it could the affect the construction process. What affects supply as well is how much it’s going to cost developers and other people looking to buy land or purchase it, then build. The lower the cost of resources, obviously the more profit that can be made or supply that can be provided.
If building and labour and those other factors are relatively high, it might not be as attractive to develop and make additional property because then you won’t make as much profit and what’s the point what if you’re the developer and you’re not actually going to make a profit?
Jayden: That’s your only job, you’ve got to make a crust.
Finding demand to create supply
Louis: That’s the last point where developers go in the property industry and are focusing what they can see there is a demand for. If they can see demand for small inner city residential apartments, that’s what they going to supply. If there’s a bigger demand for outer suburb four bedroom houses, that’s what they going to supply. So a lot of the time there’s a bit of a relationship between what’s been demanded and then 18 months what later what’s been supplied.
The property clock will help you understand this. When something is in demand that’s when it starts being constructed. With the property clock it’s Louis’ favourite thing in the stock market and like the weather, there cycles if you put o’clock up on the wall.
Look at 12 o’clock the top of the clock that’s the peak of the market.
3 o’clock like the declining market
6 o’clock is the bottom of the market
9 o’clock is the rising market
So it’s different the ebbs and flows and peak to trough /rising and falling.
Australia’s market in context
Sydney, which has obviously had a big run in detached dwellings or houses (which are different to units), are in a rise and approaching a peak in the market (according to the Herron Todd White Property Clock). From there, you really approach the peak of the market and you then start to decline. So it might be time in Sydney to slow down and look elsewhere.
Whereas other markets like Brisbane – for example, in the house detached dwelling – isn’t as much in supply and there is construction. It is at the start of the recovery looking towards a rising market.
Equally, Melbourne interestingly is in a rising market at the moment for houses because again you can only build so fast. Houses are slower it takes more to build them so that’s in a rising market.
An example of somewhere approaching the bottom of the market or that’s just been declined would be Perth. So with mining, times were great for a while and everyone had a lot of money. Everyone could afford $15 Coronas because life was good and now it’s kind of approaching the bottom of the market which could mean once it hits the bottom of the market is actually not a bad time to buy because – “buy low, sell high”!
In those areas where there’s a hole in the price right now, a lot of developers don’t want to build there. In Perth at the moment, there’s already a bit of an oversupply so we won’t supply anymore but if supply ceases then demand will eventually pick up. People will think it’s cheap to buy, then there’s less and less on the market, so more people compare the same amount of properties.
That’s something we will cover in a lot of detail next week but some good examples of the supply side and basically property at the moment is in Brisbane, now our hometown, Fortitude Valley is a bit like the Kings Cross of Sydney, there’s a lot of apartments going up, you look at the back of any apartment currently and there are at least 20 cranes that you can see and that’s all residential apartments being constructed.
So that will be completed within the next 2 or so, a lot of them are coming on the market now which means that there’s going to be a big oversupply on those residential apartments in that sort of inner city region.
Which then some of the things that could influence that, like we covered last week in demand, were population growth if people start to migrate here then that’s more people to soak up the supply.
Louis: Other thing that supply can affect is rent. If there’s a lot of supply of apartments and they’re not all being snapped up by that demand then landlords will have to drop the rent because you have to try and attract people in.
Jayden: Assuming it’s investor stock as well.
Louis: So if it’s investor stock and people are looking to rent their place out and there’s an oversupply, they won’t be able to get as good rent compared to if you’re looking somewhere where there are no apartments for rent. So, for instance, Manhattan, the big apple! It’s a good example for not only the rent side of things but the supply side of things.
So there’s not a lot of additional supply that can be built unless they knock everything down in Central Park and start building in there.
Other good examples are Hong Kong and Singapore where there’s nowhere really left to build there’s a limited amount of supply and land.
Take away points:
- What influences supply is if there are a lot of houses or apartments being built, prices are set to stabilise or go down. If there’s an undersupply more people want it, the price logically will go up.
- Things that hold it back are government zoning laws, legislation which isn’t something that seems to happen very quickly, the cost of living and really how much stuff is being built at a certain period.
- Practical ways that you can check out and safeguard yourself is by looking at the stats of what’s being built in the area. Stick your head out the window, if there’s a crane in your backyard that’s probably more stuff going up and sites RP Data.
The Rentvesting Podcast, available on iTunes, was created by Red & Co’s Jayden Vecchio and expert financial planner Louis Strange. Together, Jayden and Louis unpack the facts behind the property market, explain what’s really going on & where the market is heading. They believe in challenging the status quo and want to get out there to educate absolutely anyone looking to enter the property market.