3 / 32
When trying to rationalise and understand market dynamics, price falls, rises, booms
and busts the first thing we need to remember is the basic economic principle of
supply and demand. Property markets across the globe see prices rise when demand
exceeds supply and prices fall when supply becomes higher than demand.
What is supply?
The level of supply in the property market is predominantly
measured by listings. This figure represents the number of
properties for sale at a point in time. Employment plays a
big role in determining the level of listings. Job security and
employment prospects determine a vendor’s ability to pay their
mortgage and therefore the pressure and likelihood of them
listing their property.
Where does demand come from?
Demand is the number of people in the market looking to buy a
property at any point in time. It doesn’t matter for what purpose
– first home buyers, developers, investors or owner-occupiers
– or where they come from – local, interstate or offshore – they
all compete for the same number of listings. There are multiple
factors which determine the level of demand such as population
growth, affordability, the economic environment, consumer
confidence and more.
So let’s look at the Australian property market and how the
demand/supply fundamentals work to create the property cycle.
2004–2008: WA growth cycle, NSW contraction cycle
From 2004 to 2008 average population growth in WA was
running at a very strong 3.5% per annum. This growth was
driven by the increased employment opportunities: the
unemployment rate fell to just 2.3% in 2008 thanks to the
mining and resource boom. This growth combined with rising
wages drove demand for housing to record high levels. Despite
this rise in demand, listings across WA did not increase at the
same rate and in turn saw the median house price for WA rise
from $230,000 in 2004 to $445,000 in 2008; a growth of 93%.
Throughout this same period prices across the NSW property
market went backwards. This was thanks to flat population
growth of just 1.0% per annum, unemployment hovering
around 5% and an increase in listings. This saw the Sydney
median house price go from $498,000 in 2004 down to
$493,000 in 2008.
And now the markets have moved through these cycles
and the positions have been reversed.
2014 to present: WA has shifted to a softer cycle
and NSW is in a growth cycle
The past 18 months has seen a shift WA’s economic
fortunes with mining and resource investment declining and
unemployment rising, leading to softer demand for housing.
This economic change has driven property owners to list
their properties – up by as much as 48% year on year – as
they move out of the local area, or state, for employment
opportunities or in order to reduce their household budget.
This combination of factors has seen prices decrease by
more than 20% in some regional areas and about 1.5% in
Perth over the past year.
NSW has shifted in the opposite direction with population
growth, labour market participation and employment growth
all picking up. When this is combined with low interest rates
it has created a situation where households feel comfortable
and secure with their budgets and mortgage repayments. The
record low interest rates have also seen investor demand rise
from making up fewer than 40% of buyers two years ago to
around 52% in 2015. All these factors have created a platform
for solid demand but also one in which there is no driver to force
sellers to list their properties for sale – total listings in Sydney are
currently 10% lower than this time last year.
Understand where your market sits in its cycle
These two time periods and property markets are a clear
example of the property cycle at work and how the balance
between supply and demand drives price growth or falls. So
if you’re an investor looking for the next “hotspot”, or a first
home buyer, downsizer or upgrader searching for an apartment
or family home, understanding where your preferred suburb
sits within its supply/demand cycle and the drivers of both
components is vital to ensure you’re getting into the market at
the right time.
How supply and demand is affecting today’s market
-20%
-10%
0%
10%
20%
30%
40%
50%
2001
2003
2005
2007
2009
2011
2013
2015
Perth
Sydney
Source: CoreLogic
Property cycles in action
Annual capital city house price growth
Perth up Sydney down
Sydney up Perth down
1