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. They are constantly monitoring 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.
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 in 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 absorbing the excess
construction...and on the cycle goes, ultimately leading to the
next undersupply and the next period of opportunity.
Where is each
major urban market currently positioned? ...or call Quartile on
02 9499 4999.
