Knowing the Cycle: Supply and Demand

Recent articles in this newsletter have focused on the mechanics of the property market and the importance of ‘knowing the cycle’. A recurring theme in the discussion is the message that property is an asset that must be held long term, through fluctuations in interest and vacancy rates and structural economic shifts.

The advent of the internet, however, seems to have turned investment into a game of speculation – who can be the ‘most right’ about what happens next. In truth the only person you need to be in competition with is yourself. Knowing the cycle will enable you to ride the market with confidence.

In today’s instalment of knowing the cycle, we delve into the relationship between supply and demand, using a Blue Wealth pioneered metric that analyses the relationship between residential supply and vacancy rates. Without getting into the nitty gritty, this involves assessing the correlation between supply and vacancy rates, providing a dynamic metric that more directly measures how supply affects an investor’s cash flow through its relationship with vacancy rates. Results are as postulated: the correlation between supply and vacancy rates is positive. That is, as supply increases, vacancy rates have a tendency to also increase.

From a cash flow perspective, the more important metric for an investor is the speed at which supply is absorbed. The vacancy rate figure below is from a recently approved Blue Wealth micro market (stay tuned!). Vacancy rates are a primary indicator of past and present demand for rental accommodation. The peaks in the series, as one would expect, coincide with the introduction of new supply. As indicated by the ticks on the below graph, the market absorbs supply quickly. The combination of these two characteristics illustrates demand elasticity, meaning the suburb has high appeal to tenants and is significantly less likely than other areas to experience extensive periods of vacancy.

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