Ask any property investor what the most important measure of imminent price increases (or decreases) in an area are and they'll say "supply and demand".
Ask them how to calculate supply and demand for a property location and they will look at you as though you are asking them to donate their arms to charity.
Who doesn't get frustrated listening to the media, the experts and everyone else who has a personal opinion on where and when to invest? Are you left wondering whether their opinions are a thumb suck, a hunch or biased opinion or do they really know how to crunch and interpret over 1 million data points to score and rank order all 15,000+ Australian suburbs (that's 15,000+ house and 15,000+ unit markets = 30,000+ micro property markets) for capital growth potential in order to inform their opinion on the best places to invest? I certainly am. It's best to question... and even better to know how to do this for yourself.
The universal law of SUPPLY and DEMAND states that if demand for property outweighs supply, then prices will increase as buyers compete for a limited number of properties. Conversely, if supply exceeds demand then prices will fall as sellers need to discount their properties in order to sell.
It really is that simple.
All you need to know is where to find and how to analyse these stats for an objective view on where to invest. We know the stats work because our stats-based view on where to invest has consistently outperformed the subjective views of the property market ‘experts’ … and we have now been in business for more than a decade to build this case.
In our business of assessing areas for developing property, we use our Boomscore algorithm (clever tech) as a proxy for supply and demand. We certainly don't do the work manually ourselves. No one could unless they had all the time in the world and were a data junkie and spreadsheet guru. And not many property investors are.
Boomscore is so beautifully simple and answers the big questions:
When is a suburb relatively oversupplied?
In the example below, there are 100 properties for sale in a particular location.
There are only 30 buyers for these properties.
The sellers have to drop their prices to attract the limited number of buyers.
Prices therefore drop due to the low ratio of demand to supply.
But what happens if there are hundreds of suburbs with fewer buyers than there are properties for sale ... which suburbs are relatively more oversupplied?
The importance of this question will become apparent as we move on ...
When is a suburb relatively balanced?
In the example below, there are 50 properties for sale in a particular location.
There are only 50 buyers for these properties.
The sellers and buyers are very much on the same page. The buyers are happy to pay the price that the buyer paid originally (assuming they did not renovate). Yes, prices may have gone up slightly but the value not much after we factor in inflation.
Prices therefore remain stable due to a balanced ratio of demand to supply.
It's interesting to note that the vast majority of suburbs are balanced. The reason for this is property markets are constantly seeking balance. As prices move up, more developers move in creating more supply. Maybe more people decide to sell. This brings the market back into balance.
When is a suburb relatively in higher demand?
In the example below, there are 20 properties for sale in a particular location.
There are only 50 buyers for these properties.
The sellers can raise their prices due to the high demand.
Prices therefore rise due to the high ratio of demand to supply.
But what happens if there are hundreds of suburbs with more buyers than there are properties for sale ... which suburbs are in relatively higher demand?
Again, the importance of this question will become apparent as we move on and its answer will form the foundation of your success.
The 8 supply and demand signs that property prices will boom
Are you ready to get the answer to the holy grail?
Okay, next up I will show you 8 powerful property market statistics that are individually good indicators of supply and demand.
Their real power, though, lies in combining them into one single measure of the ratio of demand to supply. Sure, you can find them easily online. But individually, they can create more problems than they solve.
Here's a clue.
Auction clearance rates are a well known proxy for demand.
Let's say there is only one auction in a location and the property sells ... that's a 100% clearance. Most people would agree that a suburb with a 100% auction clearance rate is in relatively high demand.
But is the auction of only one property a fair measure of demand? What if that one property did not sell on the day? Suddenly the area would be deemed very low demand because the auction clearance rate drops to ... ZERO. We need to be very careful about data anomalies that can be very misleading.
Measuring supply and demand
In the next chapter we examine 8 key indicators of supply and demand for property.
These statistics make it possible to crunch the numbers for thousands of suburbs in mere seconds in a consistent way. By adopting a multi-criteria analysis the probability of data anomalies skewing the results is reduced considerably.
For example, if the auction clearance rate is based on 20 auctions in an area AND is further backed up by low 'vendor discounting' and perhaps a very high 'online search interest' then we can assume the data is quite accurate. I'll go into more detail about these indicators in the next chapter.
Article by Michael Fuller