While many investors are keen to identify areas of strong demand, it’s equally important to understand the supply side of the equation and how an increase in development in an area can effect long term price growth.
At a basic level, when the supply of property stays fixed and demand in that area increases, prices tend to increase as well.
Alternatively, an increase in the supply of new developments to an area can easily see prices stagnate or fall even if demand remains steady.
It’s this seesaw effect between supply and demand that can catch some investors out, identifying areas of strong long-term capital growth only to find that large tracts of land have been earmarked for hundreds or even thousands of apartments in the near future.
Many people think that this is a sign of growing popularity for the area but even banks are aware of supply side risk and many restrict lending in certain areas depending on the postcode.
While not publicly stated, areas of Sydney like Zetland, Alexandria and the city precinct have been flagged by major banks as areas of caution and are only willing to lend up to 70% rather than the usual 80% or 90%. If banks are aware of the risk then that should also raise a red flag to investors looking in that area.
The risks related to an increase in supply don’t always relate to growth either. An over-abundance of apartments in a single area can often mean that the property “product” becomes homogenized.
Often many properties in large developments have the same location, face the same direction and have a similar floor plan. Prospective tenants then find themselves looking at very similar properties with no defining features between them other than a height increase. In cases like this, the owner of the property is often forced to compete on price simply to distinguish their property in the market. Not a good result for any investor.
So how can you ensure that there is sustained growth in the area that you’ve chosen to invest in, without being compromised by an increase in supply?
Choose an area with limited supply of land for development
Large areas of rezoned industrial land or new land releases on the edge of town do not bode well for those looking for areas of limited supply. Ideally the best areas are those that are well established and provide little room for future development. If in doubt, contact the local council town planner and ask about any developments or rezonings occurring in the area.
Choose an area with height restrictions
All councils will have planning policies for their areas and will allow a certain height level for new development. To check the precedent in the area you can simply go on to the council website and look at the Height Maps, or simply take a look out the window and gauge the heights of the surrounding buildings. 3 storeys is manageable, 50 is questionable.
Choose a property with a unique, desirable feature
Some of the best performing investments have been made in old terraces or period homes – properties that reflect a well-loved style that will never be able to be replicated in their original state. Well-located terrace homes are the perfect example of limited supply and strong demand and for that reason, command a high price in the market place.
Properties with water views often command a higher price as well. A desirable view of the ocean or harbor can equate to hundreds of thousands of dollars more for a property even when located in the same building.
So while it is important to identify areas of long-term growth, some foresight around supply is equally important. Make sure that the demand of the area is large enough to absorb any new development. Find areas of growth where the availability for development is restricted can also ensure long-term price increases.
Finally, identifying properties that have unique and desirable features can also be beneficial in keeping the value of your investment buoyant, keeping your investment on the up and up even when times are tough.