Make sure you understand the property supply chain

Understanding the chain, which leads to future property supply, is an important consideration before deciding to invest in to a market.

Forecasting future property supply is arguably the single most difficult task for property analysts. Analytically-minded property investors enjoy statistics and while statistics do play an important role for property analysts, some statistics have greater relevance than others. Then there's the skill in being able to interpret statistics.

Building approval statistics play an important role in understanding property markets. Building approvals are a lead indicator for future property supply. 'Approved' doesn't mean 'built'.

The property supply chain is such that lot owners must (first) apply to the local government authority and have the application approved, (then) secure the necessary funding, and (finally) begin construction. The time lag from building approval through to completion of construction often ranges from six months to two years. Building approval statistics are relevant for property investors because they have a direct impact on that relationship between demand and supply. Generally speaking, when there are a large number of buyers (demand) at a time when the levels of supply are low, increased competition is created and price growth then occurs.

Conversely, when supply is high buyers have more choice and prices are discounted. A lot of property investors don't understand the lag affect that building approvals have on property values.

An investor might purchase into a buoyant market and neglect to study the supply chain.

Supply might be tight at the time of purchase, however, there might also be a large volume of new properties literally 'on the drawing board' and slated for construction completion in the near future.

A much softer market might be just around the corner.

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