How do you measure an oversupply in the market? – Andrew Wilson

How do you measure an oversupply in the market? – Andrew Wilson

 

In today’s show Senior Economist at the Domain Group,  Dr Andrew Wilson, explains how we can tell when enough becomes too much, that is when a market goes into oversupply and prices are impacted.

 

Transcript:

Kevin:  Gee, we hear a lot about how our market has gone into oversupply. I don’t know how many times I’ve heard about the Brisbane market going into an oversupply of units only to further down the track find that that simply wasn’t the case. How do you measure an oversupply in the market? When is enough too much? Dr. Andrew Wilson, the senior economist at the Domain Group joins me.

Andrew, thanks for your time.

Andrew:  Pleasure, Kevin.

Kevin:  When is enough too much? How do you measure an oversupply?

Andrew:  Even though oversupply, of course, can have consequences for developers in the shorter term and perhaps investors in the long-term, I’m not sure that oversupply has quite the negative connotations generally that we put to that descriptor.

Obviously, markets that are oversupplied are typically high-rise apartment markets. The very nature of construction of those developments being large scale means that typically supply does move ahead of demand. There is a sense, I guess, of looking into the crystal ball from developers in terms of matching demand with supply, but over the longer term, all these markets do adjust one way or the other.

It’s interesting, of course, that we had a big oversupply issue – notionally an oversupply issue – on the Gold Coast. Of course, there was significant development over the past decade in high-rise apartments there. There were issues over the shorter and medium term in terms of prices growth, but one of the interesting facts of the Gold Coast apartment market even though prices growth has been relatively subdued is that it now offers very high yields for investors who have those investments.

Yields on the Gold Coast apartments are as high as 6% in some developments – and higher – and vacancy rates are quite low, so there is a consistency in terms of not just the return on income but the level of the return on income.

I guess it’s which way you look at it in that sense, Kevin, from the notion of oversupply. Of course, that high level of, particularly apartment construction, means jobs, jobs, jobs and that works its way then on into the economy which does then feed back into demand for housing.

I think that’s what we’ll see in the Brisbane market, particularly, as an example. I don’t think the Brisbane market will have quite the oversupply issue that the Gold Coast had, because it’s more of a residential market rather than a holiday-focused market, which of course, the Gold Coast developments were designed for. I think that Brisbane high-rise apartment market will generally absorb demand over the medium term as there is growing interest in living in the city and in apartments.

But oversupply, I guess, is signaled by falling rents or reduced rental growth and also reduced prices growth. But these do tend to be short-term dynamics and they do adjust over the medium to longer term.

Kevin:  I do think sometimes we tend to look at how many units are under construction or being planned for. We then look historically at how much demand there’s been. That can always indicate that we’re headed for somewhat of an oversupply.

I sometimes wonder, Andrew, whether it’s a bit like “Build it and they will come.” I know that you can’t say that necessarily, but sometimes it does happen.

Andrew:  That’s right, Kevin. That’s the point. The nature of high-rise development and particularly in a suburban or in a city high rise development where it’s typically brown field sites, so there needs to be some sort of a cooperative element with governments, and of course, governments are always quite keen for economic development and particularly construction given that we’re having this shakeout in the resources sector now that we need to find other ways of generating jobs. Construction is always a very positive economic driver. It creates a lot of downstream economic activity as well as onsite jobs, so governments are very keen to facilitate this.

But as I said, I think that Australia really characterized – particularly capital cities – by an undersupply of property over the longer term. I think that we’ll see most of these markets that are notionally oversupplied, these inner city high-rise markets, adjust sooner rather than later, with perhaps the exception of the Melbourne market.

That’s generally a CBD market rather than a neighborhood market, which the Brisbane market is, an inner city neighborhood market. I think we’ll start to find buyers particularly as that growing demand is growing interest for inner city apartment lifestyle takes hold in Brisbane, and we’re certainly seeing signs of that already.

Kevin:  Good talking to you, Dr. Andrew Wilson, senior economist with the Domain Group. Thanks for your time, Andrew.

Andrew:  Pleasure, Kevin.

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Kevin Turner
kevin@realestatetalk.com.au
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