What shapes property trends?
Looking at organic cycles
The term ‘organic cycles’ refers to the broader trend of interstate migration and pricing. Organic cycles are not driven by a specific infrastructure event or anything like that. Instead, what we do know from our study of historical house prices in Australia is that when the major capital cities (Sydney and Melbourne) boom, they tend to be followed by the other capital cities in order of their population size.
If you see Sydney boom, Melbourne will follow quickly thereafter. Then you’ll see a boom in Brisbane, followed by Perth, then Adelaide, Hobart and Darwin. This is not an exact scientifically-consistent trend, but a broad trend over time from studying the history of house prices.
The theoretical explanation for this is that when one city becomes too expensive, people will sell and they will move to a more affordable city. This in turn creates demand in the second city, pushing up prices there too.
This same effect also occurs in the regional centres in each state. For example, in the state of New South Wales, if Sydney booms then Dubbo and Wagga Wagga will soon follow with a boom too.
5 factors driving property growth: Supply and demand
At the end of the day, housing is a product. It’s a product that requires several factors to manufacture and has a certain demand. There are five factors that drive growth in the housing market. The factors that affect the supply of housing include land, materials and labour. The factors that affect the demand for housing include job creation and amenities.
1- Land Supply
The very first thing that is required to create housing is the availability of land. If the government in a local area has released a lot of land or has rezoned a lot of land, there could potentially be an oversupply of new blocks of land available. In some cases, there simply is no more land to redevelop which puts serious upward pressure on the house prices in that area. Since there is no more land available, low supply and high demand cause a price increase.
2 – Material Supply
The second factor is the materials to build the houses that go on the land. The availability of materials can seriously affect the cost of building houses and in turn, affect the price of properties in that area too. There are many factors that can affect the supply of materials. In recent times, we’ve seen forestry areas wiped out by bushfires reducing the amount of timber available. We’ve also seen factory closures in China due to COVID-19, affecting the supply of all the fixtures and fittings that go into a house, such as tap fittings, light switches and so on.
3 – Labour Availability
The third factor that goes into creating a house is labour. A lack of skilled labour or labour, in general, will result in available tradespeople increasing their rates significantly because they will have more work than they can handle. This in turn will flow through to the cost of building which then flows through to the price of houses in that area too.
4 – Job Creation
Job creation is the fourth factor and it affects the demand for housing. When new jobs are created in an area, it will trigger the recruitment of people from other areas to move there to take those jobs. When those people start arriving they will need accommodation. This creates competition for the available rental and sales availability. This causes upward pressure to be placed on both the price of houses and rents in the area.
5 – Amenities
The final factor that affects house prices is amenities. New amenities can attract people to an area. For example, if an area did not have a shopping centre, then all of a sudden a major shopping centre has been built, there will be a significant increase in house prices. This is because many people would have not considered living in that area without a major shopping centre nearby.
This also happens with new public transport links. New train lines or new train stations on existing lines in particular. Most people who work in the city don’t have a car park and in fact, prefer not to drive into the city for work since the traffic is generally horrible. Those people will instead look to catch the train to work every day. If there is no train line into a particular area, then all of those people making use of the train would not consider living in that area. Therefore, once a new train line goes in or a new train station is added, you’ll see a steep jump in house prices as new buyers enter that market.
Location matters: Navigating the essentials of property selection.
Now that you’ve identified a thriving location, the next crucial step is pinpointing the ideal property within that area. The right property will seamlessly align when all financial considerations harmonise, and meticulous risk management measures are in place.
When contemplating the type of property to invest in, various questions may arise. Should you opt for residential or commercial? Are houses, townhouses, or apartments the better choice? New or old properties? While we’ve briefly explored these questions throughout our journey in this email series, let’s delve deeper into these considerations.
Your understanding of these finer details will play a pivotal role in making informed decisions and ensuring a successful investment venture.
Join us next when we look at the first one; residential or commercial properties?
~Daimien Patterson
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