Supply and demand in buying investment properties

Thursday, 18th Nov 2010

Most investors consider demand when assessing a potential investment, but fewer consider the supply side of the equation. Oversupply has the potential to jeopardise that important growth you are looking for when investing in property for the long-term. Essentially, you should think about how easily your investment can be replicated by others, or in other words, how much competition your property will have. In any market, where there is high supply of a commodity (your property), potential consumers or users of that product enjoy more choice – therefore your ability to command a premium price is reduced.

Areas on the fringe of suburbia, with large tracts of undeveloped land nearby are a good example of this. It can be difficult to achieve a high price for a property in such an area when similar properties are readily available in new land subdivisions nearby. It would be better to have a property in an established area with high demand and little room for expansion. Similarly, high-demand areas that are “land-locked” by hills or bodies of water can limit future supply and put upwards pressure on prices.

It is also important to keep track of zoning regulations in the areas you are interested in investing. Residential zoning is used by local governments to regulate housing density. If a locality you are interested in is zoned to allow high-density apartments or townhouses, there may be too much supply, or potential supply of these types of dwellings to give your investment the growth potential you seek. It is very easy for others to build properties much the same as yours nearby.

When we look at supply factors in identifying suitable property candidates for clients, we identify areas in which there is likely to be little competition – that is look for properties with unique, highly valued features, avoid areas in which there is a lot of free land for expansion and keep an eye on zoning and development issues.