The Property Commodity Curve: Understanding the phases

As a sophisticated property investor, you need to understand the commodity curve. Properties are not simply going up in price all the time, but rather they are continuously fluctuating through a supply and demand cycle. Phases in the cycle include a flat, boom, peak and correction.

Figure 1. The commodity curve

During the flat period, nothing too exciting really happens. This is a time when demand is equal to supply causing prices to not change much. Since the market is stable there’s no pressure to put prices up or increase production. Something will then trigger the market to boom. This happens when demand suddenly becomes greater than supply. Alternatively, a boom can also occur if there is a sudden reduction in supply. It works either way, there just needs to be a difference between the supply and the demand to create a boom. You’ll often see a lot of people start investing at this point further increasing the demand.

When a boom takes place, anyone who produces a commodity will start to increase production. For example, if you were in business producing bricks, and suddenly you hit that boom and all of a sudden your stock of bricks is selling out. You’ll have no choice but to increase production and at the same time increase your prices. The same thing happens with every commodity from bricks and bananas to iron ore and coal. Housing is just the same, it’s a commodity that goes through the same cycles of supply and demand.

Eventually, you’ll get to a point where the supply matches the demand, that is, you’re making just enough bricks for your customers. This is known as the peak. It is inevitable that production will be slightly overdone before demand starts declining again. You’ll find you start to have a surplus of commodities and need to start scaling back on production and drop prices slightly. Some people may refer to this phase as a bust, a collapse, a disaster or the bubble bursting (you know, that property bubble that doesn’t exist). It is actually called a correction as the market begins to correct itself and once again returns to a flat period.

What’s important to notice here is that after the correction and all the hype is over, the market still made an overall increase when compared to the previous flat period. This is how the commodity curve works and it’s normal. As an investor, it’s something you should expect and be comfortable with, knowing that at the end of the cycle, your commodity will be worth a little more. This is why property investing is a long-haul game and you need to take a long-term view.

Figure 2. The commodity curve showing growth after a correction

Stay tuned for more insights from Wealth Through Property.

~Daimien Patterson


Leave a Reply

Your email address will not be published. Required fields are marked *

Fill out this field
Fill out this field
Please enter a valid email address.
You need to agree with the terms to proceed

Legal Disclaimer: This information ('the information') is presented for illustrative and educational purposes only. It is not presented nor should it be treated as real estate advice, legal advice, investment advice, or tax advice. All investments involve risk and potential loss of money. If you require advice in any of these fields you should contact a suitably qualified professional to assist and advise you. Your personal individual financial circumstances must be taken into account before you make any investment decision. We urge you to do this in conjunction with a suitably qualified professional. Daimien Patterson, IntegrityX Enterprises Pty Ltd, and their associated trading names, companies, researchers, authorised distributors and licensees, employees and speakers do not guarantee your past, present or future investment results whether based on this information or otherwise. Daimien Patterson, IntegrityX Enterprises Pty Ltd and their associated trading names, companies, researchers, authorised distributors and licensees, employees and speakers disclaim all liability for your purchase decisions. You should do your own independent due diligence and seek the advice of qualified advisors before making any investment decision.