Given that my bottom has been sitting in the real estate chair for decades, many of my clients and friends often concerned about certain headlines call me for an opinion. By Scott O. Talbot
Everything is a cycle from human functions, financial markets and certainly the real estate market.
Influences from external factors such as monetary policy across the spectrum to immigration and consumer confidence and investment behaviour.
With the onset of technology in the past 2 decades the world has certainly changed, wherein confidence and fear can be communicated in seconds globally at an exponential increased volume.
With todays technology, at the input of a keyword into Google, we can find competing discussions for both a ‘Property Bubble’ and ‘Property Boom’ both sensational headlines that can either bestow confidence or despondence.
We are certainly in a real estate boom with no crystal ball predicting a bust, demand will soften in 2016 with areas identified as over supplied, dropping by at least 10%
Australia real estate supply and demand property cycle
‘Back in the day’ market conditions where relatively slow moving communications and the news paper was the only source of market opinion. For the younger people reading this, yes there was a time before the existence of the internet and reading the morning papers (not my phone or device) was not only a lifestyle habit but essential.
My opinion is; I acknowledge both Bubble and Boom.
Every market turning point or market condition within the complex matrix of property investment is a cycle. Too often, the mind set of a property investor is to treat their real estate portfolio as a stock market share portfolio. Sell on a high, get out in a crash and speculate as if the markets days are numbered.
Supply and demand coupled with monetary and planning policy are the key influences for the real estate market, in my opinion.
There was a time however, when behavioural practices and policy was a key consideration prior to 1992. Prior to this period, Melbourne ‘inner city living’ was a new concept and had very little market interest or support. It wasn't that long ago that on a Sunday in the Melbourne central business district the streets were void of anyone, as I recall the CBD population was under 2000.
At this milestone, the Australian government from local to federal recognised that building more highways and suburbs was costing too much and was unsustainable, and the shift to redeveloping the inner city was manifested.
Known as Agenda 21 globally, the change in Australia’s urban developement policy was born.
Getting back to the subject of a property boom or bust scenario. Within the cycles of supply and demand within any given milestone of 5 or 10 years there are winners and losers. The looser is always the property investor that panics and tries to sell their property at less than the previous market price.
In a recent cycle 2010-2013 approx. when demand had dried up predominately due to market confidence after the GFC. Sellers where beside themselves with the value of their property as agents whom still need to make a living during these times, struggled to find buyers for devalued properties and the sheer volume of real estate on the market. Low ball selling and an unfortunate situation for many. Moreover, this was a clear situation of supply and demand.
Auction Clearance Rate
2012 = 22%
2015 = 79%
I have one priceless example of our behavioural impact on real estate values that was not within Australia but in my other base in Hong Kong. During the Outbreak of Bird Flu in Hong Kong in 2005 the residences where full of panic from this phenomenon delivered by mother nature. The loss of life and panic was unprecedented and panic selling of real estate and the evacuation caused and immediate and catastrophic fall in property values. Only to recover immediately after the behavioural opinions of its residences changed from despondence back to confidence.
Understanding Supply and Demand is not that difficult to comprehend.
Look at our food supply chains as an example. What happens if a cyclone wiped out Australia’s banana plantations ? The demand is X based on our population but the supply Y is now depleted and the cost of a banana sky rockets.
Moreover, try to buy fruit or vegetable out of season and the evidence for supply and demand will demonstrate itself.
In any given market or product, as long as the supply and demand is balanced the market will absorb with supply and demand remaining affordable.
Not that the real estate market is this simple but allot of the principles can be applied. When the demand for real estate is greater than the supply, prices will rise. When the supply is greater than the demand, the prices will fall. Combine this with the other contributing factors such as monetary, economic and immigration that is unique to Australia, a property investor can see the signs and prepare for a cycle. A good read on Australia’s third economy can be found on my profile page here: “The Conundrum down under - the housing shortage -vs- population in Australia”
Real Estate Market Supply:
I often get challenged that the sheer amount of off-the-plan apartments on the market today is evidence of an over supply. This is true, it appears the amount of stock has increased expodetially recently with Chinese and foreign property developers entering the Australian market.
To this issue however, we need to look at the organic ‘supply’ safety guard of off-the-plan sales. In a nut shell, if any given project does not sell, or reach the project funding approval trigger of at least 80% in pre-sales, it is very unlikely that the project will proceed to construction. Thus, the supply is reset and reduced and harmoniously balances the demand.
The Australian banking sector is also very conscious of the artificial market influences created by overseas investors and will only recognise sales to the local market in their property developer approval process, stipulating in some cases only 20-40% of pre-sales to foreign investors.
Supply and demand when applied to new off-the-plan property investor segment is inherently controlled by pre-sales and project financing measures. Therefor, if the supply or fear of over supply is controlled by pre-sales and demand, the balance will almost certainly be maintained.
Real Estate Market Demand:
So how do we ride the cycles, they do happen as demand within itself is a cycle that is the trigger for supply. Demand changes on our investment behavioural patterns such as moving more towards bricks and mortar or back and forth to the share market. Pair this with global and localised economic confidence, immigration intake and interest rates, demand is a more complex matrix than supply. Unfortunately there is no straight up answer, many of these elements are beyond our governments or an investors control. A global economic crisis effects everyone and is beyond our management, all we have is the ability to mitigate its effects as evidenced by Australia standing strong during the GFC.
Its only the panic seller during a down cycle that losses, not the estate investor that never sells. There is more on this subject on a previous article here: 'Fruit or Nutt Investor'
The opinion for now is: We are certainly in a real estate boom with no crystal ball predicting a bust, demand will soften in 2016 with areas identified as over supplied, dropping by at least 10% and as the mining resource sector slows, the housing market will increase. Immigration will continue to be Australia’s ‘third economy’ that will protect Australia from any global influences.