Discover a powerful market indicator - Suburb Absorption Rate - that big developers use to identify the fastest selling suburbs to invest in to maximise their returns.
Developers like to invest in locations that sell fast and at better property prices than their competition. This makes complete sense if their goal is to get the most profit out of their development ... of course this is the case! They do this by looking at a powerful market indicator called the Absorption Rate.
And you can too!
When deciding where to invest in property for maximum capital growth, supply and demand is always a key consideration.
In a rising market, supply is measured by the number of properties available and demand is measured by how much buyers are willing to pay for them. If a market is in a rising trend, demand will exceed supply and prices will go up. In a falling market, demand is less than supply and prices will drop.
Of course, the biggest challenge for property investors - and everyone else with assets tied to real estate - is analysing supply and demand to determine how fast properties are selling relative to what is available for sale.
Additionally, supply and demand is not a static being. It moves as a market evolves. It is this movement (and its trend) that can highlight your next opportunity.
When it comes to predicting property prices, one factor to consider is how quickly properties are being sold or bought relative to the new supply entering the market.
Put another way: we need to measure the 'market absorption rate' to find the fastest selling suburbs.
By understanding this indicator, you'll better predict what will happen in the future when you're ready to buy or sell real estate assets: your home, your investment property, a development project and all other forms of real estate investing.
Let's get into it.
What is Market Absorption Rate?
If properties are being bought relatively faster than sellers are entering the market then they are absorbed faster by the market.
In this scenario, sellers are less likely to discount their selling price, and indeed, may even increase their prices. We see this when property developers test the market by obtaining sales of their unbuilt stock.
If these off-the-plan sales move fast, then developers will increase their sale prices accordingly. The opposite also applies.
Calculating the absorption rate is useful because it gives you an indication of whether your property is in demand or not given the rate of sales relative to supply.
How is Market Absorption Rate Calculated?
The market absorption rate is calculated by dividing the average number of sales per month in an area by the total number of properties available for sale in the area.
At Boomscore we take the number of houses or units sold in 30 days in an area and divide that number by the total number of houses or units for sale in that market over the same period. Depending on how 'hot' the market is, we may adjust this time period to get a better reading.
Let's say a suburb has 100 properties for sale. If buyers snap up 10 homes per month, the absorption rate is 10% (10 homes sold per month divided by 100 homes available for sale). Not only is this a potential buyer's market but also an indication that the supply of houses will be exhausted in 10 months (100 homes divided by 10 homes sold/month).
To find out the absorption rate in your suburb, divide the total number of homes or units sold in a specific period of time by the total number of homes available for sale in that market in the same period.
The total number of properties available for sale can be determined by examining the stock on market. The stock on market is the number of unique property listings on realestate.com.au, domain.com.au and other portals or on Boomscore as the stock on market percentage (which dives even deeper into the concept of, not only the number of listings but the number of listings as a percentage of all properties in that suburb).
You can also find the number of properties sold in a given period by checking the real estate portals mentioned above.
Traditionally, an absorption rate above 20% signals a seller's market in which homes are sold quickly. An absorption rate below 15% suggests it is a buyer's market in which homes are not being sold as fast relative to the number of listings.
Why Monitor the Trends in Absorption Rate?
I mentioned earlier that a suburb's absorption rate does not consider properties that enter the market at various times but rather is a snapshot at a particular point in time. This is not useful if a suburb has a 'good' absorption rate today but is actually getting worse over time. For example, the absorption rate might be 20% today but was 30% two months ago and is dropping fast towards a buyer's market (too much supply).
One way to get a better reading is to track the trends in the absorption rate in real time by tracking the ratio of houses or units sold to the current listings on the various property portals.
Remember, the absorption rate of properties in a suburb is calculated by dividing the average number of sales per month in an area by the number of available properties for sale in that area.
... So, as a Seller, what does this mean for you?
If you are considering selling your property and want to get the most money for it you’ll want to wait for a seller’s market. When we reverse the calculation to find the number of months it would take for homes to sell in a market, a seller’s market will have a low monthly supply rate.
At Boomscore we advocate not relying on one market indicator but rather combining multiple supply and demand indicators to ensure they back up what each other indicator 'says'.
For example, if there is a low monthly supply rate then the corresponding days on market (DOM) reading should be low (properties are selling relatively fast) and the stock on market percent (SOM%) should also be low.
If auction clearance rates were very low - suggesting low demand - then this would beg the question...why? Maybe the answer would be as simple as there was only one auction and it did not sell ... but when all indicators align then we know we can act on them.
According to corelogic (23 Sep 2021)
Freshly listed housing stock is starting to lift as the spring selling season begins to heat up. Every Australian capital city has seen a lift in the number of new real estate listings over recent weeks, with some of the largest listing increases recorded in those capitals navigating lockdown. Despite this, the new listings trends remain below the five-year average in every capital apart from Adelaide, Perth and Darwin. Nationally, new listings bottomed out over the four weeks ending September 5th with just 31,731 new listings added to the market, the lowest volume since the seasonal low in January this year. While new listings have since lifted by 9.8%, the number of new listings is currently -21.6% lower than the recent high in March and -3.9% below the five-year average for this time of year.
Are the Current Absorption Rates for Your Suburb Trending Up or Down Relative to the Listings?
You now have the formula and process to find out. We'd love to connect with you on our socials to continue the discussion and hear your thoughts.
And please feel free to share this article with your friends: