10 October 2019

Understanding supply and demand

Adrian Atelj
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Whether you are just starting out in property or have prior experience buying and selling, understanding the basic principles of supply and demand can ultimately make you richer when it’s time to buy or sell.

Demand

The principle of demand is that where there is a greater need or want for particular goods or services, they will often sell for a higher price. Where there is little demand, the price will often be reduced in order to entice people to buy it.

In real estate, where there is high demand for a certain type of property in a particular area, and a limited number of these properties available for sale, the price of these properties will tend to increase. That’s when you’ll start to see homes selling way over reserve at auction!

Supply

The principle of supply is that where there is an increase in the amount of goods or services available, prices will drop. The same is true of property. Where there is an increased supply of properties for sale in an area, prices will decrease. Where there is a shortage of properties, prices will go up as multiple parties try to outbid each other.

Ultimately, supply and demand are interconnected. An oversupply of properties results in decreased demand for housing, and prices fall. If you’re selling in this type of market, it will usually take longer to sell because fewer buyers will be competing per property.

“A quick way to determine the state of supply and demand in your suburb is by looking at how many properties are advertised online,” said homes.com.au Founder & Managing Director, Pat Carbone.

“If you’re thinking of selling, check the number of ads in your suburb a couple of times per month and look for changes in volume to get an idea of when to go to market.”

Factors that influence supply and demand

Selling your property at exactly the right time, when supply is low and demand is high, is no simple task as it can take many months to get your property ready for sale, especially if you are renovating to sell for a greater profit.

One of the main factors that drives demand for properties is low interest rates. When they are low, people get excited about buying and investing and they tend to take on larger mortgages. Buying demand increases; and if there is a limited supply of homes for sale, prices increase too.

On the other hand, an increase in development and construction in a particular area will lead to more properties for sale, thereby bringing prices down and lengthening the time it takes to sell.

Land is finite

Whether you are buying, selling or investing, it’s important to remember that land is a finite resource. Australia might be a ‘land of sweeping plains’ but the bulk of our population lives in one of only eight capital cities! That makes land in those cities finite, and with the population continually rising, it’s land value that appreciates most.

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