How to use demand and supply indicators when buying a property

Welcome to Part 4 of our Grow Your Portfolio Series with Wealthi

Missed out on Parts 1-3? Click the links below to catch up.
Part One: How to Use Demographic Data to Research the Property Market
Part Two: How Do Infrastructure Developments Determine the Success of Your Property Investment?

Part Three: How to manage your emotions when buying a property investment

Savvy investors know that making a smart property investment is all about understanding how to measure supply and demand. 

Investing in the wrong area can cost you thousands of dollars in lost rental returns and missed capital growth opportunities. Instead, you need to understand what key metrics (such as stock levels, vacancy rates and auction clearance rates) you need to track and how to research the property market. 

We sat down with Domenic Nesci (Co-Founder of Wealthi) to bring you this four-part blog series about how to grow your property portfolio. In the 3rd part of this series, we focus on how to read the market to successfully measure supply vs demand and identify trends that can inform where to invest next.

What does ‘supply’ and ‘demand’ mean in the context of real estate investing?

You’re in the game of making a profit from your investments. When assessing the market and deciding where to invest next, your decision needs to be backed by the numbers. And that’s where supply and demand metrics come in. 

Out of all the market indicators, supply and demand have the greatest impact on property prices. But first, let’s unpack what each term actually means:

  • Supply means how many properties are listed for sale in a particular market, often referred to as ‘stock levels’. 
  • Demand means how many buyers are actively looking to purchase properties in a particular area. 

These two terms are always viewed in relation to each other. When supply exceeds demand, property prices are likely to drop. On the flip side, when there are more buyers than properties for sale, prices are likely to rise. 

Assessing demand supply ratio is a powerful property investment tip to help investors (like you) make informed decisions about whether a location offers the potential for secure tenancy, solid rental returns and ultimately long-term capital growth.

What you need to know before researching supply and demand in an area

As we mentioned, price growth happens when demand (the number of buyers) exceeds supply (the number of properties available for sale) in a particular area. 

For investors, this means reviewing the number of properties listed for sale and tracking the level of buyer interest in an area is key to assessing whether prices are rising or falling in that location. 

And here’s why this matters:

  • Purchasing in a “hot” or competitive market can mean you’re paying more for a property than you might be able to generate in rental income. 
  • However, buying a property in an area experiencing oversupply may mean you’ll struggle to find tenants, which can lead to long periods of vacancy or lower rental returns.

Domenic is quick to remind investors that real estate investing is a long-term game, and cautions against focusing on short-term gains.  

“With property, you don't want to get sucked into the short-term views and try to predict what's going to happen in the next 12 or even 18 months,” tells Domenic. 

“The biggest issue is people try to treat property like shares or trying to trade property. And that's why you see a huge amount of people making losses.”

So, let’s look at some practical ways you can assess the long-term viability of a location and uncover the best places to buy investment properties in Australia.

What should you be researching to determine supply vs demand in specific local markets?

When searching for the best investment property locations, it’s essential to review supply and demand indicators. These stats will reveal the areas with the highest demand for rental properties, which can help you boost your rental returns and reduce the chance of vacancy. 

Here are four property investment tips and strategies to assess supply and demand when researching specific local markets.

Review supply in the current market

First up, it’s important to get a lay of the land and understand how many properties are currently up for sale in the area (a.k.a. supply). 

To do this, jump online and review the volume of sales listing on Domain and Realestate.com.au in the suburbs you’re thinking of investing in. 

Filter by the type of property you’re looking to purchase, including price range, number of rooms, car spaces and whether it’s new or established. This will give you an accurate picture of the state of play for investors in this area.

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Track how much stock is getting sold vs how many properties are listed

Next up, it’s time to assess demand in the area. Using the online real estate databases mentioned above, you can easily review both the number of properties up for sale as well as recently sold properties. 

Domenic encourages investors to dive into this data and keep tabs on any suburbs you’re thinking of investing in to assess demand supply ratios. 

“If you're a data geek, you can start to track how much is getting sold versus how much is getting listed. That's a very interesting ratio to get an indication of demand,” explains Domenic. 

If there’s a high number of properties listed for sale (but not many recent sales), it might indicate there’s an oversupply issue in the area. However, the volume of sales listings matches the number of recent sales, this can indicate demand is strong. 

Assess vacancy rates

Successful investors purchase investment properties where tenant demand is high. A vacant property can cost you hundreds of dollars each week in lost rental returns, so investing in suburbs with low vacancy rates is key to safeguarding your investment income. 

To assess vacancy rates, head online to SQM research’s online dashboard. Here you can research vacancy rates by city or postcode and track the performance of these suburbs over the past 15 years. 

Look at auction clearance rates

One of the most accurate and timely measures of the state of the property market is auction clearance rates. These figures (shown as a percentage), reveal how many properties were sold at auction and are usually updated weekly on a Saturday evening. 

To check the latest auction clearance rate in your local market, head to Realestate.com.au’s recent auction results and sales dashboard. This dashboard also gives investors a breakdown of the properties sold privately vs at auction. 

As a general rule, the best investment property locations show high clearance rates (usually over 80%), with strong demand from buyers and ultimately tenants. On the other hand, low clearance rates (under 60%) reveal demand is weaker and prices may decrease as a result. 

Investors can use these supply and demand indicators to their advantage by investing in areas with high auction clearance rates and strong demand. Plus, low auction clearance rates can be a helpful warning sign to investors to avoid areas with potential oversupply issues. 

Case study: Should you consider investing in regional markets due to COVID-19?

With remote working now a viable option for many Aussies, COVID-19 has accelerated the transition from crowded CBD workplaces to home offices. And with that has come the regional property market boom.

As Domenic shares, Wealthi predicted that regional markets would perform very well at the start of the pandemic - and the data backs them up. 

Stats from CoreLogic reveal a number of regional centres such as Grampians (VIC), Noosa (QLD), and the York Peninsula (SA) have seen price growth of over 13% in 2020 alone. And in some areas (such as Austinmer, just 70km south of the Sydney property market), prices have jumped over 40% in the past 12 months

In contrast, capital cities across the country have experienced much lower levels of price growth, with an annual rise of 3.6%. Hobart led the charge with 6.4% annual price growth, followed by Canberra (5.2%) and Perth (4.2%). 

So, what are the key factors driving this growth in regional property prices?

Why is the COVID-19 regional market boom happening?

Let’s dive into the three big trends driving the booming market conditions we’re seeing in the regional property market. 

  • Affordability: investors and buyers alike have been drawn to regional areas for their historic affordability, with the ability to purchase larger properties for a much lower price tag than the majority of capital cities. 
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  • Lifestyle: the rise of a sea and treechangers has been spurred by the appeal of wide open spaces, easy access to lifestyle amenities (such as beaches, parks and bushland) plus the lack of congested roads or long commutes into bustling CBDs.
  • Flexibility: with more employees working remotely and employers allowing teams to collaborate online, the need to live in close proximity to the city is no longer a barrier to relocating to a regional area. 

The combination of more affordable properties, superior lifestyle opportunities and the ability to work from home has all created the perfect conditions for a booming market in regional postcodes.

Is it going to stay?

However, the team from Wealthi believe this isn’t a trend that's going to last forever. “There is a great lifestyle that you can have by doing everything online,” tells Domenic. “However, I don't think that's forever. We're going to see major metropolitan hubs attract people back in, especially when things start to normalise again.”

The lack of face-to-face interaction is one key factor that Wealthi expects will bring workers back to the city centres. “Fundamentally, we miss being around one another. I don't know about you, but I do miss coming into the office,” reveals Domenic. 

As borders reopen, there is also expected to be an influx of overseas students and tourism arriving in major metropolitan hubs, which will see demand rise in Australia’s capital cities. 

While regional property prices are still expected to grow in 2021, Domenic believes we’ve seen the peak of this boom. “Regional centers will grow, but not as dramatically as they have over the past 18 months,” tells Domenic. 

Ultimately, investors shouldn’t bank on exponential growth in regional markets when deciding where to invest in 2021 and beyond. Instead, it’s worth thinking long-term and planning for the return of workers and tourists to city centres and investing in properties that will see increased demand in the years to come. 

When deciding where to invest next, supply and demand indicators can help you uncover areas experiencing strong demand and price growth. By identifying long-term trends that can impact your bottom line, you’ll be in the best position to invest in areas with signs of low vacancy rates, strong rental yields and the potential for capital growth over the life of your investment.

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We have partnered with our friends over at Wealthi who are experts when it comes to property investing. Co-founder Domenic Nesci who comes from an impressive background in financial planning and real estate development, has been more than happy to share his personal experiences on how he started to build his now very impressive property portfolio, and the risks he took to get here. 

Over 4 parts, we share valuable and useful advice in partnership with Wealthi, to help you make the best decision on where to make your next property investment purchase. If there’s anything you take away from this, it would be to make sure you do your own research, and dive into the data head first.