Investment Theory: Supply and Demand

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Investment Theory: Supply and Demand

Having relevance to many forms of business, the law of demand and supply is a basic economic principle that must be studied. It explains the relationship and interaction between demand and supply for a product/service that affects the pricing of that product/service. In other words, the law states that when there is increased demand, the prices spike up. If there is a large supply and there is low demand, prices fall.

The law of demand and supply is also prominent in the housing market. The relationship between demand and supply affects the pricing of properties in the real estate industry. Whenever there is a high demand for properties in a particular city but a lack in supply of quality properties, house prices go up. On the other hand, when the demand for housing is low and there is an oversupply of properties, prices tend to go down.

Why does it matter?

It is beneficial for potential homeowners, property investors, brokers, and anyone in the real estate industry to understand the basic logic of demand and supply. When you have a good grasp on how the law of demand and supply affects the housing market, you are able to make more informed decisions when it comes to investing in real estate.

It helps consumers, real estate brokers, and agents alike decide when’s the best time to buy or sell their properties. For first time homebuyers, an oversupply in a given area can mean lower-priced homes. It gives them more opportunities to make a good deal when this is the situation. On the other hand, property owners who plan to sell, deem the oversupply negatively as it means their own properties get devalued, forcing them to sell properties at a price far cheaper than when they originally bought it.

Investment Theory: Supply and Demand | A9 Property | Brisbane Real Estate

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Supply Fluctuation

It is a given fact that housing supply is always changing. Every year, housing supply is reduced through abandonment, wreckage from natural disasters, and demolitions. At the same time, the construction of new houses adds to the supply. To keep the supply at a steady pace, new construction should be around 3% of the current housing supply.

Importance of Demand

Without demand, supply means very little. Demand determines real estate pricing and demand can change the course of the supply. One factor that affects demand is the area’s population. As the population grows, your supply decreases and housing prices go up.

Another factor contingent to demand is the purchasing power of buyers. Wage levels, inflation, and other factors are used to gauge the purchasing power of consumers. If the purchasing power is weak, supply won’t be met, and demand will be weaker. If disposable income is high and increases faster than inflation, demand for housing should be strong.

Investment Theory: Supply and Demand | A9 Property | Brisbane Real Estate

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Balance is Key

When considering a purchase, it is best to monitor property prices and the trend of demand and supply in areas you plan to buy from. This is to ensure that you’re making a worthy investment. Different factors can heavily influence the balance of demand and supply. Albeit hard to achieve, balance is key to ensuring consumer demands are always met and it is key to creating more saleable properties.

For more great free content like this, check out our regularly updated property investment blog. At A9 Property we provide resources and investment advice to help give our readers the inside track on property investment. We also have a carefully selected list of off-market properties for sale which you won’t find on any other real estate site. Join the discussion in our Brisbane property investors community, or get in touch with us today to find out how we can help you in your next property investment venture!

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