Supply and demand are powerful macro analysis fundamentals that all informed property investors utilise in the selection of their investment properties.
It's important to note, however, that supply and demand are only 1 of 7 key macro fundamentals that should be researched before making an investment decision.
Let's delve into the concept of supply and demand.
Supply & Demand Fundamentals
The balance between supply and demand is considered the primary driver of price movements across all asset classes, including commodities, shares, and property.
To review the simple laws of supply and demand, take the example of the dramatic change in bananas supply and demand in Australia. In 2010 the price of a kg of bananas surged from $3 to $15 within a few short months, due to the devastating impact of Cyclone Yasi, which decimated 75% of Australia’s banana crop.
While supply plummeted, demand remained consistent as Australians still wanted to buy bananas, and prices soared as a result. Once crops were replenished, supply increased and prices for bananas fell to more reasonable levels.
Supply & Demand For Property
Supply and demand affect property prices in the same way.
The higher the demand for property, and the lower the supply, the more pressure there is on property values to rise. The inverse is also true, the higher supply and lower demand, the increased risk of prices falling.
Fortunately, with the right information at hand, we can analyse and measure the factors that influence supply and demand to assist us with selecting potential property markets.
What To Look For As Investors?
As investors it's important to determine locations that best support price growth by analysing the various fundamental drivers that influence supply and demand.
The Analysis Process
Beginning analysis at a country level, followed by a state level, city level, and then the suburb level can assist an investor in selecting a market with growth potential.
This is known as a “top-down approach”. If a state or city doesn’t possess strong fundamentals for price growth, then it’s less likely that individual suburbs within that market will perform well.
By following this structured process, investors can narrow their search by eliminating regions that don’t present strong growth potential and a higher level of risk.
For instance, the below graph illustrates on a state level, the potential expectation of dwelling stock (property) deficiency (undersupply) or possible surplus (oversupply) in NSW, Victoria, QLD and Western Australia .
On a state level, it's revealed that the highest potential deficiency of property expected by 2022 will be in Victoria, followed by QLD and then NSW.
This gives investors the foresight into the potential supply and demand balance that will be experienced in all three states.
Considering the positive outlook on the potential undersupply in these states, investors can conduct further research on a city and suburb level to continue to the process of identifying property investment opportunities.
Property and other asset classes move through investment cycles and the above underlying fundamentals all play a role in the influence on property price movements. While each cycle has its own characteristics, they’re all based on similar principles.
Knowledge of the property cycle and the laws of supply and demand helps to determine when, where and what to buy.
As discussed, supply and demand shouldn't be the only factors you are considering as an investor. There are several other key factors to research on a macro and micro level before making an investment decision.
If you would like to learn more about supply and demand and how it can influence your decision as a property investor, book a call with me here.
Jarryd Gauci – Property Investment Consultant
P: (02) 9939 3249
 ABS, BIS Oxford Economics
Disclaimer: When considering purchasing a property, it's always prudent to seek the advice of an appropriately qualified professional to determine which strategy is most appropriate for your individual circumstance.