by Jemma Pearson MPP discovers that successful property investing starts with understanding the principles of supply and demand.

Want to invest in property? Don’t know where to buy, what to buy, or even how to buy? You’re not alone. Times are tough for many Sunshine Coasters, but that doesn’t mean we should all be putting our investment goals on hold. In fact, now is the time to get stuck in. If you’re serious about building wealth and using property to do it, there are so many opportunities in our region right now. But before you dive in, it helps to get informed, and understanding supply and demand is an important first step in the education process.

Speak to anyone in the know and they’ll tell you that the price of property, like any other commodity, is determined by the principles of supply and demand.

It’s not hard to get your head around, right? The higher the demand and lower the supply, the more a seller can command. And the lower the demand and the healthier the amount of supply, the harder it will be for a seller to get a high price. But if you are buying, do you go for the more desirable spot and hope the value keeps on increasing, or do you buy cheap and hope the tide will turn? And what about other potential buyers – what influences their buying behaviour?

Let’s face it, we all need a place to live, so property, unlike other forms of investing, fulfils  a basic human need. A home is a safe haven,  a shelter, and it’s not just a physical necessity but an emotional one too. However, property is a popular investment strategy and a potentially lucrative one. Let’s face it, if we all had extra cash, most of us would be considering investing in property.

If you’ve decided to place your hard-earned savings in an investment property, you’ll need to understand supply and demand,  or at least, try to. Factors such as land availability, government policies, interest rates, grants, availability of finance and rents will all impact supply (what is on the market and where) and demand (how many other buyers are out there competing with you for  a desired property).

The director and head of research and acquisitions at Investor Property, Mal Cayley, says, “All price is a function of demand and supply. In terms of property, price is a function of the desire of people to buy in an area, their capacity to pay through disposable income and the availability of credit (demand), and the relative supply of property in that area to meet that demand. Growth (capital or yield) is therefore  a function of the positive and persistent change  in these factors.

“When assessing supply we not only look at the current supply, we look at the complex factors that contribute to new supply.”

These complex factors include such things  as the availability of undeveloped and redeveloped land, the ability of government  to deliver new sites to build on, the cost of  new developments and the ability of new home owners to access finance (in other words, how keen the banks are to lend).

The other side of the coin is demand. Mal says, “When assessing demand we look at population flows and expectations, type and percentage of use (renting versus owning) and the type of property desired (keeping in mind the ‘feedback’ effect of affordability, which might force people into smaller homes than they would like).”

But there is a third, and perhaps more critical, factor, and that relates to capacity. We would all love to own our homes outright, with a couple  of investment properties on the side to see us through retirement, but we don’t all have the financial ability to do so.

“Capacity relates to both the disposable income of households, the availability of credit  to purchase and the ‘feedback’ effect of desire,” says Mal. “For example, when an economy in  one state or region is booming over another, the increase in disposable income makes property more affordable and attracts people because it’s cheap. Increases in disposable income drive price growth. When prices get too high, growth slows. If the economic factors change, people look  to live where property is affordable and there  are job opportunities (people leave because  it’s expensive).

“So the population flows between states and regions are impacted by the economic cycles  and the economic cycles are driven by the population flows. These cycles and flows have a positive and negative impact on property. Now, introduce regional differences, global impacts (such as a mining boom) and it goes to a whole other level of complexity.”

Let’s face it, you can still be a successful property investor without having to grasp the economic complexities that underpin property. But if you want to become better informed, where do you start? “There are few resources  out there that articulate well the very complex drivers of property, given the various feedback effects of population flows and affordability, which can be affected by the effects of global, national, state and regional economies, not just the one where the property is located,” Mal says. “This is a challenge we deal with every day, as our business, and our client’s success, is dependent  on our capacity to understand and communicate these factors.”

At least understanding that these factors  are important is a great first step onto the investment ladder. And if you can’t get your  head around them, getting assistance from  those who can is vital.

Say What?

Mal Cayley says, “According to ATO information, only around seven per cent of the population are property investors and 75 per cent of them only ever have just one property. In the past 20 years, half of property has performed below seven per cent average capital growth per annum (this is the magic number that means it doubles in value every 10 years).”

But don’t let that put you off, urges Mal. “The good news is that almost 40 per cent of property actually achieved a greater than  10 per cent per annum average capital growth rate in the past  20 years.

“With the structural change underway in the economy (the multi-speed economy created by  the mining boom), the performance of property will also be more fragmented (that 40 per cent per annum is likely to fall to 20 to 25 per cent), increasing the necessity to understand what actually drives property, or get help from  someone who does.”

Mike Hefferan is the pro vice-chancellor (engagement)  and Professor of Property and Development at the University of the Sunshine Coast. Here is what he has to say about supply and demand as it relates to property.

“Because property, such as a house, is such a ‘big ticket’, the components of demand are quite complex – certainly there are a number of determinants for an individual/family to have the confidence to make such a long-term commitment.

“The ability to demand/purchase a property implies the ability to pay and therefore there is a very strong link between household incomes and employment levels and the level of living demand.

“Interest rates are obviously critical – and will be a key determinant in the level of repayments and therefore affordability.

“Demographic characteristics  – particularly overall regional growth, household size and composition and age distribution – will also affect the actual type of residence required  and preferred locations. Increasingly too, energy and transportation costs and the location of public transport and accessibility are having an increasing influence on demand  in particular regions.

“All of this then needs to be balanced with the supply of new stock and the cost at which that  stock can be provided.”