The Critical Role of Supply and Demand in Property
Updated: Jun 6
Real estate in Australia is considered a significant contributor to the country's economy and underpins Australia's household wealth. Several factors affect the property market and property prices, and among the most critical are supply and demand. This article aims to provide a basic understanding of the supply and demand dynamics in property and their overall impact.
What is Supply & Demand?
Supply and demand in real estate refers to the relationship between the number of properties available for sale or rent (supply) and the number of buyers or renters looking for properties (demand). When there are more buyers than properties available, prices tend to rise, and when there are more properties than buyers, prices tend to fall.
Supply and Demand Dynamics:
Supply and demand are two of the most critical factors that influence the property market. The demand for housing is driven by various factors, including population growth, employment opportunities, and lifestyle preferences. In contrast, the supply of housing is impacted by factors such as land availability, construction of new housing, building approvals, building costs, and planning regulations.
Impact of Supply on the Property Market:
The supply of housing has a significant impact on the Australian real estate market. When the supply of housing is low, and the demand is high, it can result in a shortage of housing and therefore drive up property prices. In contrast, when the supply of housing is high, and the demand is low, it can lead to a surplus of housing, resulting in decreased property prices.
One of the biggest challenges faced by the Australian residential property market is the lack of affordable housing. The supply of affordable housing is impacted by various factors such as land availability, building costs, and planning regulations. To address this issue, the Australian government has introduced various measures such as grants and tax incentives to encourage developers to build more affordable housing.
Impact of Demand on the Property Market:
Demand is another critical factor that impacts the Australian real estate market. When the demand for housing is high, it can lead to increased property prices, making it difficult for people to enter the housing market. High demand can also result in bidding wars, where potential buyers compete for the same property, driving up the price.
On the other hand, when the demand for housing is low, it can lead to decreased property prices, making it easier for people to enter the housing market and secure a property. Low demand can also result in properties remaining on the market for an extended period, leading to decreased property prices.
Let's talk a look at some examples of supply and demand:
Low Supply vs High Demand:
Number of available houses for sale: 25
Number of potential buyers: 100
Supply/Demand ratio: 0.25 (25/100) More buyers than sellers! (25 sellers vs 100 buyers)
Result: A shortage of houses, and prices are likely to increase as buyers compete for the limited supply. This is when we see capital growth.
High Supply vs Low Demand:
Number of available houses for sale: 100
Number of potential buyers: 25
Supply/Demand ratio: 4 (100/25) More sellers than buyers! (100 sellers vs 25 buyers)
Result: A surplus of houses, and prices are likely to decrease as sellers compete to attract buyers in a market with an excess supply of houses.
In conclusion, the supply and demand dynamics play a crucial role in the property market and hence why buyers agents and property advisors with years of experience put so much weight on this important metric as part of their due diligence. A thorough understanding of supply and demand is essential for property investors to make informed decisions, manage risk, and ensure a stable and sustainable investment property portfolio.
The real estate market is complex, and supply and demand are just one of many factors that impact property prices. Still, understanding these dynamics when buying a property is a crucial starting point for anyone looking to invest, develop, or participate in the Australian property market.