Rising property prices are the result of two basic economic concepts: “Supply and Demand” and “Inflation”.
However, there is a sub-component of Demand, called “Capacity-to-Pay”, which is often overlooked.
Understanding how these concepts work together to affect real estate is crucial to one’s belief or doubt about whether real estate values will rise.
In a free-market economy, prices of any commodity will tend to drop when supply is high and demand is low.
In other words, when there is more than enough of something, it is said to be a “buyer’s market” because sellers must compete, typically by lowering the price, to attract a buyer.
Conversely, when supply is low and demand is high, prices will tend to rise as buyers bid up pricing to compete for the limited supply. This is called a “seller’s market”.
Let’s look at it this way….
- With regard to supply, new real estate house and land packages,can’t be build quick enough.
- With regards to demand, Australia has a business plan to increase the population to 40,000,000 people in the next 30 years.
For the last few decades, continued strong population growth has been a key driver supporting our property markets.
Australia’s population was growing by around 360,000 people per annum, meaning we needed to build around 170 to 180,000 new dwellings each year to accommodate all the new households.
Since 60% of our growth is dependent on immigration, in the short-term population growth will fall, but that will increase again as overseas immigrants are allowed to come to our shores once again.
However, more and more ex-pats are returning to Australia.
At the same time, the number of new properties listed for sale in our capital cities is falling creating an imbalance of supply and demand.