The property supply chain: The effect of building approvals on property values
GUEST OBSERVATION
Understanding the chain which leads to future property supply is an important consideration before deciding to invest in to a market.
Forecasting future property supply is arguably the single most difficult task for property analysts.
Analytically-minded property investors enjoy statistics. While statistics do play an important role for property analysts, some statistics have greater relevance than others. And then there's the skill in being able to interpret statistics. Building approval statistics play an important role in understanding property markets.
Building approvals are a lead indicator for future property supply. ‘Approved’ does not mean ‘built’. The property supply chain is such that lot owners must (first) apply to the local government authority and have the application approved, (then) secure the necessary funding, and (finally) begin construction. The time lag from building approval through to completion of construction often ranges from six months to two years.
Building approval statistics are relevant for property investors because they have a direct impact on that relationship between demand and supply.
Generally speaking, when there are a large number of buyers (demand) at a time when the levels of supply are low, increased competition is created; price growth then occurs. Conversely, when supply is high buyers have more choice and prices are discounted.
A lot of property investors don't understand the lag affect that building approvals have on property values. An investor might purchase in to a market a buoyant market and neglect to study the supply chain. Supply might be tight at the time of purchase however there might also be a large volume of new properties literally 'on the drawing board' and slated for construction completion in the near future. A much softer market might be just around the corner.
Take a look at Western Australia's building approval graph (remembering that 75% of WA's population is based in Perth). The volume of building approvals eased during 2010 and 2011. The lag affect of the declining number of new properties coming on to the market was one significant reason why Perth experienced above-average price growth in 2012 and 2013.
A significant rise in building approvals in Perth during 2013 means that a lot more supply is hitting the market this year.
Property developers will always find a way to build (their livelihood demands on it). A healthy construction industry generally means a healthy economy however there will always be a fine line to building too much. And statistics will only enable us to look so far in to the future.
Forecasting future property supply is arguably the single most difficult task for property analysts.
Simon Pressley is managing director of Propertyology, a full-time property market analyst, accredited property investment adviser, and Australia’s (REIA) Buyer’s Agent of the Year (2012+2013+2014).