THE POWER OF LIMITED SUPPLY IN THE CANBERRA MARKET

At its most basic level, supply and demand are the fundamental forces that drive our economy, and you don’t have to be Adam Smith to recognise the effect they have on Canberra’s real estate market. Understanding what is driving supply and demand and then using that information effectively is a key aspect of successful investment.

There’s a great example in a recent report from RP Data, which revealed that over a third of the homes sold in Canberra in the year leading up to June 2014 were sold at a price higher than they were listed for. Why is this happening? The short answer is – supply and demand. Simple right? Well, yes and no. To get a clearer picture of what is happening we really need to consider a number of factors.

1. High returns are making Canberra increasingly popular with investors
According to RP Data’s Property Capital Market Report, total real estate returns in Canberra over the past year are sitting at around 7.5%. That’s pretty impressive. There aren’t many mainstream investments that can offer returns like that. Combine that with the fact that real estate values have traditionally always increased over the long term and you can understand why many people see real estate as a such an attractive investment option – it is certainly less volatile than rare scotches, bitcoins or beanie babies. There’s no doubt this is having a powerful influence on investment activity, which as we’ve previously mentioned is at its highest level since 2003. Strong returns and the relative security of the investment is certainly part of the reason why people are willing to pay more than the asking price to secure the right property.

2. Low average number of days on the market
Currently properties in Canberra are only on the market for a relatively short period of time. The average time a property spends on the market, from the time it is listed to the time it is sold, is sitting at around 34 days. The fact that houses are being snatched up so quickly, is yet another factor causing buyers to consider offering a little bit more. They need to act fast with a strong offer so they can prevent someone else from swooping in and taking the property they want off the market.

3. Apartments and townhouses are becoming more popular
Apartments and townhouses are becoming increasingly popular in Canberra. This is partly due to their affordability (at $415,000 the current median unit price is $160,000 lower than the $575,000 median house price), but they also have great investment potential, and are often a lot more convenient, offering a low maintenance lifestyle and the option to live in closer proximity to town centres. The demand for high density housing is only going to increase over the foreseeable future, which leads to our next point.

4. A large proportion of new dwellings being constructed are multi-unit dwellings
We are already noticing the supply of multi-unit dwellings is rising to meet the increased demand. Which makes sense – if that’s what people want, that’s what will be built. Dwelling approvals in Australia have risen by almost 35% over the past year to meet the needs of our growing population. At the same time, multi-unit dwellings are currently making up a record high of almost 44% of all new approvals. But, if more apartments are being built, it means that proportionately, there are fewer new houses being built, which in turn is leading to a shortage in supply in this segment of the market.

So what does all this mean?
Simply put, while the demand for quality properties is steadily increasing, the supply of new houses is proportionately lower. And while the demand for apartments and townhouses continues to grow, there are still plenty of Canberrans who want to live in houses. But with less supply, there is naturally going to be more competition for these types of dwellings, which acts as a powerful incentive for buyers to spend that little bit extra to secure a new home or the right investment property.

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