Assessing capital growth potential: Supply and Demand

Last week, we launched our new series - discussing how to find that first, critical, investment. When we polled the Property Observer readers, the number one topic that stood out for investigation  was how to assess capital growth potential in a property.  

Each day this week, we'll be drilling down further into this particular topic, before we move onto another.  

The basics  

Property experts will disagree on a number of things: new, established, unit, house, blue chip, gentrifying and a range of other factors. One thing rarely disagreed upon, however, is this: the importance of keeping an eye on supply and demand.  

Observer Pete Wargent wrote about some of the supply/demand fundamentals to consider at the end of last year that are still as relevant as ever.

When it comes to assessing the capital growth potential of a property, the best thing any property investor can do is bring it back to this unexpectedly complicated balance.  

Let’s unpack this a little bit.  

Supply – The number of properties available in an area.  

Demand – The number of people wanting (and able) to purchase these properties.  

Bryce Holdaway recently revealed his crucial aspects of choosing that first investment property and supply/demand was clearly crucial. 

Say, for instance, I have one strawberry lollipop. Say there’s one person craving this particular type of strawberry lollipop. There may be cola lollipops, pineapple cream and others, but they want this one.  

They’re happy to pay my $1.20, when the other lollipops are going for $1. If, however, there are three people craving this particular lollipop, they might offer against each other, driving the price to $1.50. Looking at it the other way, if four people also have strawberry lollipops they're trying to sell and there are still only three people craving the flavour, it's likely the price may drop.  

This is where concepts of scarcity come into play. This was one of the factors that observer Monique Sasson Wakelin recently revealed was one of her more important points when choosing an investment property.

Investing is, largely, all about the numbers – a habit our readers think is one of the most crucial for every property investor according to a recent article we posted – so let’s see how the numbers look.  

For instance, taking an area familiar with many Sydneysiders, The Hills District. A reader recently wrote in about Kellyville, and previous conversations with real estate agents have definitely confirmed that interest is at high levels across the LGA.  

In fact, a family who put their Beaumont Hills property on the market on Friday confirmed with Property Observer that a potential cash buyer was already lined up to view the property by Saturday.  

But how is this reflected in the statistics?  

Checking online’s SQM Research, it shows that currently the level of stock on market for postcode 2155 is trending down, since February.

This does appear to correlate quite nicely to a median price uptick in the area over this time, as shown on our data page of Beaumont Hills (within the 2155 postcode).

The average days on market, also in the above link, can be indicative. With 59.4 days listed, under the Sydney number listed of 110.2, investors researching an area would be wise to watch this number change over time.  

An ideal situation for many investors, is an area where you can buy in when the market isn't as hot, or as tight, in terms of supply and demand statistics. However, you'd want to know that these numbers are going to look more favourable through time to help increase your capital gains.  

Other supply/demand indicators are available online. Boomapp, developed by the team who created DSR Score (Demand Supply Ratio Score), uses eight statistics to create a number ranking of how the area performs.  

This includes vendor discounting, online search interest, auction clearance rates and a number of other facets. Clearly, there are a number of ways to approach calculating the supply and demand of an area.  

On top of the numbers, you'll want to be questioning the area for its future potential. Sometimes, this information doesn't come up in a straightforward number and requires some forethought and analysis on behalf of the individual investor.  

Over the page are a number of questions you need to be asking yourself about supply and demand.

Questions to ask

When it comes to supply, ask yourself the following:

- What capacity does this area, and the surrounding areas, have to develop further?

Consider changes to zoning that could be made, the development-stance of the local council and any larger state plans that might affect the area. It also doesn't need to be an area with lots of land available, it could be that highrises could be built quickly.

- How quickly can supply change?

Look to see how long it can take for developments to get approval, and see if there are any 'quick' planning processes e.g. the 10-day approvals for some types of development in a number of Sydney suburbs.

- What are the different asset types, and which will be more scarce?

Even if an area is filled with units that are struggling to sell, the housing market may be a completely different story. You will want to know these inner workings.  

When it comes to demand, ask yourself the following:

- What are the demand pressures?

Look for population, immigration, employment opportunities and similar.

- What demand pressures may there be in the future?

Maybe there's going to be a new airport or hospital built, or perhaps you're expecting some significant infrastructure investment from the government. Ensure you understand what will happen and what is speculation.

- How quickly can demand change?

If, for instance, you are looking at a mining town, you will want to know how quickly the operation can be wrapped up and whether enough demand will be present from other sources. Consider this about non-mining areas too, and look for a diverse range of demand drivers.

- What type of property is in demand?

Residents may desire three-bedroom two-bathroom houses, however this dynamic may be set to change in the future. Keep the length of your investment plan in mind. You will also want to consider price point and what the majority of buyers can afford.  

We will ask the experts their process for assessing capital growth potential tomorrow, as well as fill you in on how to determine the capital growth ceiling, when to use past growth and which of these supply/demand aspects really pushes the value higher.