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The Residential Clock
During a period of strongly rising values a number of things
happen. Mainly the rate of construction of new property
increases. The reason this happens is that developers and
speculators are constantly monitoring the investment equation.
Consistently they are looking at land costs, calculating if they
buy land for $X, expend $Y on construction and sell for $Z on
completion, then the difference of course is the profit margin.
When values are rising strongly prospective profit margins are significantly
enhanced. When there is a greater potential return, more
will commit to development and the rate of construction
increases dramatically.
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But nobody tells builders, developers or speculators when to stop.
They keep building as values are rising, building more to take
advantage of the strong market. Then, at some point in time,
there will be more dwellings built, and placed on the total
market, than there are people to occupy them. How can values
rise any further, when there is a surplus of property and not
enough buyers in the market to buy them, or rent them?
Accordingly the market will stall. Values tend to simply level
off, and with inflation at work real values will fall. Developers, and speculators will withdraw
from the market. So the rate of new construction will decline.
This can take time, as it is not easy to withdraw from the
market if buildings have been commenced, so the construction
level continues to overshoot for some time.The population continues to
increase, and those reaching household formation age continue to
enter the market in their own right...and on the cycle goes,
ultimately leading to the next undersupply and the next period
of opportunity!
(Extract from The
Wealth Power of Property)
Where is each major urban market currently positioned?
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