Supply & Demand
“Too much of a good thing is wonderful” according to that legend of Vegas entertainment, Liberace. And although he might have had a point when it comes to rhinestones and baby grands, this rule doesn’t apply to all aspects of life. When it comes to property markets, for example – too much of a good thing equals danger.
Understanding the relationship between supply and demand (too much or not enough) is critical to buying property well and making profitable long-term investment decisions.
Not convinced? Here’s why the poison’s in the dose when it comes to oversupply of property in any suburb – no matter how prestigious a location.
Myth Busting Premium Locations and Desirability
Often, investors are attracted to purchasing property in areas they consider ‘premium’ – residences either directly in the centre of a populous city or in the surrounding suburbs. On the face of it, this seems a sensible decision: after all – if buying property in a prosperous city’s heart doesn’t guarantee great capital growth, what does?
Caution: first impressions don’t count when it comes to capital growth in property.
For an investor, the location of their asset is a critical part of the mix – but equally so is the demand for their particular kind of asset. The value of property only ever increases due to purchaser demand, so before you sign on the dotted line – understand if there’s a market of willing buyers prepared to pay a premium for it. Even the best locations have properties which few want to buy, due to oversupply or design faults.
Take marvelous Melbourne for example – a city to which interstate and international migrants flock because of the job opportunities that still exist there. In 2014, nearly 7000 new apartments were completed in Melbourne. Another staggering 18,500 apartments are due for completion within inner Melbourne over the next 3 years – representing a huge amount of (mostly high density, non-family appropriate) property flooding onto the market at a similar time. Despite Melbourne’s popularity and apparent financial strength, this influx of a particular kind of property means that very soon the CBD will be grossly oversupplied – affecting capital growth and the value of investments you might buy there.
The Repercussions of Oversupply
What does oversupply mean, in real terms – and why should you take pains to avoid areas that might suffer from it? If we take Melbourne as an example – oversupply means there will be more properties available on the market than willing buyers and tenants who are prepared to pay a premium for them. The new properties arriving on the market are generally in high rise towers which have a tendency to be both overpriced and poorly constructed, the majority of which are 1 bedroom units which are just under 50 m2, with two bedroom units squeezing in at around 60m2. In other words – these properties are pokey and short-term lifestyle options in anyone’s language. They suit students or singletons making their way in the big city. Families don’t want these properties (preferring to live further out and enjoy larger properties and more permanent communities), and their relatively small size and high cost means that first home buyers will have difficulty obtaining finance to purchase them.
This reduces your pool of potential buyers drastically – meaning that when the time comes to sell your property in blue-chip Melbourne’s CBD, you could potentially be looking at a loss. Your rental income may also be affected, as tenants will be spoilt for choice when it comes to selecting accommodation: there’s nothing so unique about your high-rise one bedroom apartment when there’s a pool of other, less expensive commensurate stock to lease instead. Oversupply forces prices down, and encourages vendors and landlords to discount their expectations in hope of attracting a purchaser or tenant – which is not an ideal position for any investor.
Buying in an area which suffers from oversupply is a true risk for any property owner, and a factor that can only be safely avoided with careful, intelligent research and statistics with which to fight gut intuition with market realities.
Everybody Needs Good Neighbours
Oversupply of competing property is one element which can affect the value and return of your investment – but so too are your neighbours. It’s not their noisy parties or strange hours that we’re referring to (which, although irritating won’t affect your property value). Rather, it is your neighbour’s status as an owner occupier or an absentee landlord that counts when it comes to potential capital growth.
Overseas investors are overwhelmingly driving demand for high density, small-scale housing in our bustling capital cities. Foreign buyers are attracted by our low borrowing costs enhanced by buoyant economic conditions in their home countries, our stable political environment and upwardly mobile property market – and despite the potential of discouraging regulations being put in place by the government – overseas investors’ attraction to buying ‘off-the-plan’ in Australia looks set to continue. Most of these foreign investors will lease their properties rather than electing to live in them, and some will leave their properties unoccupied. An increased number of vacant or leased properties in any body corporate (high density dwelling) is cause for investor concern: the sheer stress on a building of tenants moving in and out constantly is compounded by intense wear and tear on communal areas, and a general sense of impermanence. These conditions: a high percentage of leased or permanently vacant properties, swiftly aging buildings, absentee landlords abstaining from body corporate meetings – all conspire against your investment’s growth, actively putting your nest-egg at risk.
So how to protect yourself from buying into a ‘ghost investment’? It’s all in the research and expert knowledge.
Word to the wise: when buying a home to live in, go with your gut. Live where you love, where you need to be – purchase the home that represents value to you, a place you’ll be happy. When it comes to buying an investment however, it’s the numbers that matter – and that trusty old gut that must be ignored. Counter intuitive as it seems, steering away from the apparently popular and blue-chip areas makes great sense.
Choose your investment based market realities and statistics: don’t take it for granted that things are always what they seem when it comes to supply and demand.
In any area you’re looking to invest, you need to look at demographics to make an informed decision. What upcoming developments are tabled for the area, what quality will they be and how many properties will there be in total? Who are the key buyers for the area today, and who will they be by the time further developments are completed?