Discussion – Real estate supply
During my readings of The Armchair guide to Property Investing, there is a good section discussing about the supply and demand of properties. Let’s have a summary of the supply side.
Tl; dr;
Supply is determined by the following factors:
- Available land that can be rezoned/released in the future.
- Possible subdivisions in the area.
- Current property types, e.g. apartments, houses, units, etc.
- How fast between approvals and new properties entering the market.
Future available lands
Just a caveat here, I am interested in residential properties, so this blog will only consider that aspect of real estate.
Also my timeline is as follows:
- 0-6 years: speculative
- 6-10 years: short term
- 10-25 years: medium term
- 25+ years: long term
Considering you are looking at a suburb, e.g. Elizabeth, SA 5112.
It is the CBD of City of Playford, and we can see that there is no more land to be released. Therefore new land supply is basically non-existent, and as an investor, this ticks the first box of restriction of supply.
Now let’s look at a nearby suburb in the same city council.
There are a lot of lands available in the east and south part of Craigmore, therefore the council can decide whether they should release the land in the future. Considering I am going for a long term buy and hold, i.e. 25+ years; this is a real possibility if I were to purchase in this suburb.
Possible subdivisions
This is a bit trickier, but can still be done by looking at the current and approved development applications for a certain suburb. For example, let’s look at the list of current applications in Elizabeth, SA.
The text can vary, but generally the description is something like “Land Division”. And my job is to determine of how many has been approved, how many has been applied for a given time; e.g. last 3 years, accumulated by year to determine the trend.
This information is public information. For Playford city council, we can pull application data from 1993, which is helpful when trying to determine trends. All councils should have the development applications tracking page, and you just need to look for it in their websites.
The more subdivisions are approved, and the speed of them being approved will determine how many new dwellings will enter the market in the near future. Forecast that number into the future using the past 3 years trend and you get a rough number of new dwellings in the next, say 10-20 years.
Current property types
If the suburb is dominated by detached houses, this will not be a problem in the next few years. However, in the longer term, there’s nothing to say about the council not easing the requirements to build semi-detached houses, townhouses or even apartments. Lucky for us, the plan of the city council normally goes for 15-20 years ahead. Therefore we have a rough idea of what do they want residential properties look like in the next decades.
If there are apartments being built, especially high rise apartments, then the supply is going to be massive, since there is no telling how many high rise can be done in the next 15-20 years, and each of them can accommodate many households. We will come back to this when we discuss the demands, but for now it will be a red flag when determining the supply of the area.
One of the easiest way to determine what types of properties are dominating the market is going there yourself. But if that is not possible, asking several real estate agents should do the trick.
Speed between approvals and actual properties enter the market
This is actually a bit easier to guess, normally a small build like 2-3 townhouses takes around 6-12 months to complete after being approved. However, it varies depending on the suburb. It is much easier to figure that out by checking the approved applications from 2 years ago and see if the address was on for sale or for lease. As mentioned above, the application history is available online, as well as the records for sale or for lease.
It will give us a good indications on the delay of stock, for example, if it takes a long time from the approved stage to the actual building entering the market, there will be more stress on the supply in the short term. Therefore the price can go up a bit more than it should be.
Summary
Supply is one crucial part of the supply-demand matrix. Understanding what supply comprises of will help me to determine roughly a good area to invest in. There are a lot of manual work involved but I think it will be worth it in the end.
“To acquire knowledge, one must study; but to acquire wisdom, one must observe.” – Marilyn vos Savant
By Tuan Nguyen
No Responses