There is nothing ‘simple’ about property markets. The formula is nothing like “3 minus 2 equals 1”.
Whenever someone expresses an opinion about housing and includes the statement ‘…it is a simple equation of supply and demand…’ it really grinds my gears.
Lots of people do it. They naively assume that ‘demand’ equals population growth and that ‘supply’ is a measurement of new home construction.
Anyone who tries to tell you that is merely highlighting how little they really know about property markets.
A lifetime of studying the evidence has taught me that, no matter what is happening in the world at any point in time, there are always dozens of factors which collectively influence property market performance.
Across Australia in almost every year, some cities/towns may produce a capital growth rate of (say) 10 percent while different cities/towns will see property values decline in that same year.
When I say: ‘dozens of factors’, I mean it in a literal sense.
I prefer to separate the 60+ factors at play into three (3) categories.
1. GENERAL FACTORS
Demand does not exist unless there is a ‘want’ to transact in real estate, which is completely different to the rubbish about population growth that all of the amateurs foolishly believe.
One’s financial capacity and the desire to change domicile will waver at different stages in one’s life.
The below general factors affect individual household circumstances:
- age and number of people living in a household
- wanting to upgrade to a higher quality home
- wanting to buy one’s first home
- wanting to upgrade to a bigger home
- wanting to invest for a better future
- wanting to build a brand new home
- wanting to renovate one’s existing home
- relationship change (marriage, divorce, domestic violence, adolescents moving out of home)
- household equity
- household savings
- growth in household income
2. MACRO FACTORS
These are various state, federal and global reins that, when pulled, influence all property markets across Australia in some way:
- global turmoil (wars, pandemics)
- strength of leadership and (big picture) vision
- responsible management of government finances
- economic growth initiatives
- industry sector opportunities/threats
- inter-nation trade agreements
- exchange rates
- commodity prices
- overseas migration patterns
- housing grants and incentives
- stamp duty policy (hurdle)
- deposit raising policy (hurdle)
- building regulation (hurdle)
- credit assessment policy (hurdle)
- the price of credit
- personal tax rates
- land tax policies
- rent legislation (user-friendly, or otherwise)
- cost of construction materials
- supply chain delays
- availability of development finance
- superannuation policy
- lifestyle trends (inner-city living, regional relocation, WFH)
- media commentary (glass-half-empty reporting)
- political stability
- society tension (union threats, socialist protests, radical groups)
3. MICRO FACTORS
These are factors which are uniquely local. The results for each metric in this list can vary quite significantly from one city/town to another:
- asset values (housing affordability)
- size of household debt
- volume of homes available to buy
- volume of homes available to rent
- employment opportunities
- natural economic resources (food and booze production, precious minerals and metals, energy supply)
- natural attractions (wineries, nature tracks, beaches, tropical climate, cool climate)
- rent prices
- internal migration patterns (loss versus gain)
- community engagement/hostility
- zoning changes
- job security
- consumer confidence
- local visitor economy
- business confidence
- water supply
- energy supply
- major events
- lifestyle attractions
- infrastructure investment
- housing types (suburban house, apartment, acreage, townhouse, luxury home, duplex)
- transport access (road, rail, air, sea)
- tertiary education facilities
- healthcare facilities
- land supply
- labour supply
- building approval volumes
- traffic congestion
- housing density
- natural disasters
Anyone can talk-the-talk, Propertyology walks-the-walk.
There is a massive difference between an individual’s general intelligence and their topic specific intelligence.
An overwhelming majority of people who comment on property markets, regardless of their occupation title, actually have very poor topic specific intelligence. Refer back to my opening 3-paragraphs.
Every second day there will be a bunch of bozos somewhere who jump to more (usually negative) conclusions all because the dial on one metric moved a poofteenth.
“Aagh [pulls hair]. The latest data shows retail trade increased ‘x’ percent over the last 30-days. How dare people have a good time [frowned face]. OMG, this means inflation will increase [adjusts their grey cardigan]. Interest rates will now rise, and households everywhere will get into default… the crash is coming [cheeky grin emerges],” said the lemonsucker.
Because everyone lives in a property, humans relate to it and assume they understand property markets reasonably well. It gives people false confidence.
Subconsciously, humans assume everyone else’s likes, dislikes and preferences are the same as their own. So, they come to emotional conclusions, which are often totally contradicted by the official evidence.
Any conclusion that is made without removal of all biases is a totally uneducated assessment.
While I appreciate that suburb ‘hotspot’ stories attract great click-through traffic for journalist’s KPIs, suburbs are little more than imaginary lines on a map. Make no mistake, suburbs are not hotspots.
To the tech nerds and data scientists who prefer to believe that an algorithm can be written (or a ‘model’ can be developed) to accurately predict medium term asset value performance, you are all seriously kidding yourself.
There are far too many variables to include in a so-called ‘mathematical formula’. Besides, many of the most important inputs aren’t expressed numerically.
Micro factors (things which vary widely from one individual town/city to another) have much greater importance than macro factors.
Despite being spoon-fed all of this valuable material, it remains nothing more than theory until all of the information for each of the 60+ categories are collected from each of Australia’s 400 individual townships.
The biggest challenge is then having the skill to join all the dots and to make an educated assessment of how the combined sum of all factors will produce a different performance in each of those 400 townships.
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The assessment process never stops.
Conditions are forever changing. New policies will be produced. New opportunities will unfold in some locations while potential risks arise in others.
So, yeah, there is nothing ‘simple’ about housing supply and demand.
It is the love for this challenge that has driven me to devote a lifetime to studying it, investing my own money into it, and continually learning.
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