Supply and demand impact apartment values in more ways than one

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We all understand the law of supply and demand and how it impacts prices in every market from coal to carrots.

Supply and demand definitely applies to the real estate market and it is often talked about with regard to the relative supply of new apartments compared with the demand to buy or occupy apartments.

I was in a Macquarie Bank Property Market update briefing yesterday with Eliza Owen – Head of Residential Research Australia for Core Logic and something she said piqued my interest. Eliza was talking about the growth in housing values in regional areas. She attributes a large amount of the recent rise in values to the fact that very few people are moving out of regional areas and into metropolitan areas. Particularly in Melbourne and Sydney.

Consequently there has been a decline in the supply of houses for sale while demand has held firm which has driven up prices. That is to say a reduction in the number of people who want sell their home in a regional area and move to the city. We are not talking about a change in the supply or demand in the absolute number of properties or buyers but a change in the supply of properties on the market for sale at any one time.

If we hypothetically assumed the number of apartments for sale in Melbourne suddenly reduced by half it makes sense that values would spike based on the laws of supply and demand. But all else being equal and assuming neither the absolute number of apartments (supply) nor the number of buyers (demand) has changed, then over time values would return to normal once the number of apartments for sale returned to previous levels. You see this short term impact sometimes in a specific apartment building when a number of the same style of apartment come on to the market for sale at the same time and normal demand can’t absorb it.

Unless there is a permanent shift in the absolute supply and demand levels then the volatile price shifts in everything from apartment rental values to regional house values will over time return to previous levels (give or take a bit) once the pre pandemic supply and demand levels also return to normal. If the demand levels increase permanently then more houses or apartments are constructed to meet that demand and redress the balance.

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