What makes property markets rise and fall?
This entry was posted on 1/18/2006 1:18 PM and is filed under Commercial & Residential Property.
So, what makes a market sometimes rise, sometimes fall, and other times simply move sideways?
During a period of rising house prices the rate of construction of new property increases, mainly because developers and speculators are constantly looking at land costs, construction costs and profit margins and when values are rising strongly, then prospective profit margins are bigger. When there is a greater potential for return, more developers will commit to building and therefore the rate of construction increases dramatically.
The problem is, nobody tells builders, developers or speculators when to stop. They keep building as values are rising to take advantage of the strong market, until at some point there will be more dwellings built than there are people to occupy them. How can values rise any further, when there is a surplus of property and not enough buyers in the market to buy them, or rent them?
Accordingly the market will stall and values tend to level off. This causes developers to withdraw from the market over time and the rate of new construction to decline. Meanwhile the population continues to increase, and those reaching household formation age (those people born 25-30 years ago who are about to enter the property market) continue to enter the market in their own right. As time passes, the excess property that was over built during the boom is slowly absorbed as more people progressively enter the market.
The first sign of this is in the rental market where the vacancy rate will fall and rents rise. With rising rents and values remaining relatively level, the prospective income return that an investor can receive increases and therefore investors are attracted back to the market.
As investors re-enter the market after a downturn, the market will start pushing prices up slowly. Home buyers see values rising. Home buyers, especially first home buyers, are very price sensitive so they jump into the market.
That attracts more buyers, creating a snowball effect, setting off a full scale boom. Construction increases as the developers become active again, projecting us into the next cycle.
That is the supply and demand cycle which will go on forever. The importance of supply and demand in determining whether values will rise or fall, overshadows interest rates, tax changes, budgets, elections, and other factors. Supply and demand drives prices. Other matters can affect the timing of the changes, but supply and demand are the fundamentals in determining whether values will rise or fall.
For expert assistance with your residential or commercial property for sale or for lease, contact www.donnellan.com.au or e-mail info@donnellan.com.au
