The Commodity Curve Exposed… What Is It Anyway?
Understanding what happens to prices over time is an important part of a property investor’s education, because it can help you look back, look ahead, and know whether it’s the right time to buy.
Let’s talk about market cycles and property prices.
The flat period occurs when supply equals demand. During this time, prices don’t move.
Following a flat period, you can expect a boom to occur where supply is outstripped by demand. This means there has either been a reduction in supply or an increase in demand.
Here’s an example for you… when Cyclone Larry wiped out all of the bananas in Queensland, banana prices went up! It wasn’t because people wanted to eat more bananas, but because a large portion of the available crops were wiped out. As a result, farmers who did have bananas were able to charge significantly more.
Another example is the Christchurch earthquake in New Zealand. Following the damage of the earthquake, a lot of people needed somewhere to live. Supply was reduced because of the number of properties that were destroyed or in need of repairs, and as a result, prices had to go up.
Following the boom, you can expect a peak. This is when the supply has caught up with the demand and prices can’t go up any further.
Here’s how this works… during the boom, as prices start to rise, supply will start to catch up. If we’re talking about property, this will look like developers coming in and building more houses, as they spot an opportunity to cash in on the demand in the area. Of course, this can take some time for the product to be produced, from initial decision making to finally coming on the market.
But once a good portion of the increased supply lands on the market, demand is met, resulting in the peak.
Next up is the correction. What happens is, although demand has been met, there’s still more product in the pipeline that is due to hit the market. When it does come on the market, it can temporarily cause a flood, where supply significantly outstrips demand. The correction occurs because these products still have to be sold. Because they are no longer in demand, the price needs to come down and meet the market.
Production will slow down or stop at this point, as it won’t make financial sense to keep producing more of something that isn’t selling.
However, this correction is temporary, and as the market regulates itself, it will resume the flat period and start a new cycle.
Of course, Today Tonight and A Current Affair will call this correction a “bubble bursting” but really it is simply the market adjusting to demand. You’ll note that following the correction, the new price is still significantly higher than it was at the beginning of the previous cycle. This is how it works!
If you are a smart property investor, you will understand how this works, you’ll know it’s going to happen, and not be caught out by a correction. You’ll also be able to spot a boom when it’s about to happen. You should expect this cycle to occur in all your property markets and hang onto your properties long-term so that you ride out the booms and the corrections and always come out on top.
Daimien Patterson is the CEO of Integrity Investment Properties, a property investment company based in Australia. He regularly produces books, blogs, and videos on the topic of property investing. Head to [integrityinvestmentproperties.com.au] for your free copy of Daimien’s book, Safe as Houses.