It is true that buying a property in any market will generate a lot of wealth as long as you (1) buy the
right property and (2) hold it for a few decades. But it is also true that you do not need to rush into the market at the risk of substantially overpaying.
My wife and I planned to buy an investment property this year so we have been monitoring the property market a bit closer than usual this year. Of course, we expect to pay fair market value for a high-quality asset (quality assets rarely sell for less). But we have no interest in overpaying. We are happy to wait on the sidelines until we are able to buy an investment-grade property for a fair price.
What we have noticed this year is that overpaying is almost the only way to successfully purchase a property – sometimes by more than 10%! I wanted to discuss (speculate) why this might be happening and counsel property buyers to be patient and diligent.
Is demand greater than supply?
It was my initial hypothesis that a lack of supply was responsible for driving property prices higher. That is, that the volume of property buyers exceeds the volume of properties available for sale.
The graphic below include property listing charts for a selection of locations from the beginning of 2010 to date. You will note that property listings in some locations are well below trend, particularly coastal regions. This supports my theory that tight supply is pushing prices higher. However, as you will observe, there are some locations where listing volumes appear to be normal.
Of course, we must remind ourselves that listing volumes (supply) is only one half of the equation. Demand is the other half. It could be that whilst supply is normal, demand could be above average.
Demand is very high
Probably the best indicator for demand is the volume of new mortgages, as depicted in the chart below from the
ABS.
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