How many times have you heard someone describe a property market as “too hot” or “overheated”? There’s actually no such thing as a market that’s “too hot”.
Don’t get me wrong, there are definitely markets that investors should be fearful of. But not hot markets. It’s actually cold markets that should shiver investor spines.
Clarifying the cliché
When I hear the term “too hot” used in reference to property, it invariably gets qualified further by a statement like: “buyers are paying too much”.
Most would argue paying anything above fair market value is paying "too much". But think about it this way:
“If nobody pays "too" much, i.e. above market value, then prices never rise”
A market experiencing capital growth is one in which the majority of buyers are paying above market value – effectively paying what some suggest is “too” much.
Supply & Demand
Whenever I use the word "hot" to describe a property market, I'm always thinking of demand exceeding supply. That imbalance can force prices up; it can move stock quickly; it makes buyers competitive; auctions hectic; open inspections busy. That to me is a "hot" market - one in which demand exceeds supply.
It’s a fundamental law of economics and not something to be fearful of. Rather, investors should capitalise on this knowledge.
When supply and demand are balanced, prices are generally flat. That may be good for Goldie-locks, but it's not good for property investors. We want hot markets.
Demand cannot exceed supply by "too much". If it did, we'd have a concept called, "too much capital growth". Investors might gain "too much equity" leading to "too much wealth" and "too much financial independence and security".
Is there a point when demand can exceed supply by "too" much? What happens in this case? Does the law of supply and demand suddenly invert? No. There's no such thing.
The greater the degree by which demand exceeds supply, the greater the pressure there is on prices to rise.
Many people think that if demand exceeds supply, this is a hot market and therefore one to avoid, as if they were too late. Wrong. You want to avoid cold markets. That's when you're too late.
Head towards the light, the heat, where demand exceeds supply. Cold markets are capital growth wastelands.
Jeremy Sheppard is head of research at DSRdata.com.au.
DSR data can be found on the YIP Top suburbs page.
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Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.