| Understanding Supply and Demand in Real Estate
The basic principles of supply and demand in real estate have a major impact on your property investment success.
It is important to carefully consider the supply of, and the demand for, property in the area where you are looking to buy.
Generally the prices of property move in response to the changes in local demand and supply. Real estate supply and demand can be very localised. What is happening in one area can be substantially different than in another area.
Demand – Is the dominant driving force in real estate
The basic principle of demand is that when there is a greater demand for something prices will generally rise. And when demand drops so do prices.
In real estate, if there is a high demand and limited stock of a certain type of property in a particular area, the prices will increase and even sell for more than listing price. If there are many homes for sale within the area, prices are more likely to decline.
Demand has its own balancing mechanism, when demand increases and prices rise, there comes a point that prices rise to a level that forces demand to ease, and then prices will level off. Without buyers, supply means very little. Demand is a strong determinant of real estate pricing.
Supply in Real Estate is Always in a State of Flux
The principle of supply means that an area with an increased or over supply of properties for sale will see prices soften and have downward pressures. If there is a shortage of properties, prices will go up.
Supply is regularly balanced with new construction activity. New constructions are often a good way to measure the state of affairs in the real estate industry.
Real estate supply and demand are intrinsically interconnected. If you have an oversupply of properties you will see a decreased demand for housing, and prices fall. In this type of market, fewer buyers are competing, pushing prices down and “days on the market” (D.O.M.) up. Volume has a big effect on the housing market.
Factors that can affect both the supply and demand of housing include:
- Interest rates
- Economic growth
- Mortgage availability and lending criteria
- Population growth
- Wages growth
- Speculative demand and
- The supply of housing (Both new builds and numbers for sale)
Factors that may Influence Rising Demand Levels include:
- Infrastructure projects like roads, transport, schools and hospitals
- Development of recreational facilities and shops
- Private enterprise creating new employment opportunities
- Renovations and improvements of existing homes, making the suburb more desirable
Factors that may Influence Increased or Over Supply include:
- New estates and developments
- high density housing
- People moving out of the area
It is vitally important for you to research and take into account the supply and demand relationship in the area you are wanting to purchase. This also importantly includes current and forecasted future supply and demand in these areas.