The Pandemic and Supply Side of Real Estate
Anyone who knows anything about the real estate market knows that prices rise and fall. When prices fall due to high rental vacancies, people are quick to blame developers for creating a surplus of properties. However, experts say it is more likely that these falling prices are due to a reduction in demand.
Once the pandemic hit, borders were closed reducing the number of students, tourists and migrants moving into Australia. This, in turn, decreased housing demand and prices took a nosedive. But what does that mean for the future of real estate? Read on to find out.
Will History Repeat Itself?
The border closures experienced due to the pandemic is not something Australia has seen often. In fact, the last time anything like this occurred was in WW II (and before that in WW I).
Both times the reopening of the borders brought an influx of migrants and students who didn’t previously have access. Real estate prices rose to make up for any previously experienced loss. In fact, in this instance, the demand may become so great that Australia will not have the supply to keep up.
It is predicted that when the growth spurt happens, developers will be favoring areas that have recently experienced strong demand. This will lower risks ensuring that the capital investments they make will pay off.
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How Soon Will It All Happen?
There is no saying how soon it will be before prices rise again. Based on similar situations in the past, it may take years before the market becomes healthy.
In the meantime, developers may begin to presell units before they are even built. This can be an effective way to bring in revenue while waiting for buyer demand to increase, but it can have the opposite effect if demand slows down.
If that happens, we will once again be facing an oversupply problem. Buyers will also be at a loss because they will have purchased properties that are no longer worth the price they paid. They will be contractually obligated to pay off the balance following any deposit they made.
A similar situation occurred in the Gold Coast high rise unit market due to the Global Financial Crisis.
In 2004, before the crisis occurred, buyers were encouraged to buy units with low deposit bonds. As a result, developers gained approval to build high rise projects to meet the demand.
When the GFC hit in 2008, demand basically collapsed resulting in a massive oversupply due to the units built. Rents prices fell and there was a high number of vacant apartments.
Fortunately, the 2014 opening of the G-Link light rail and the 2018 Commonwealth Games led to a growth in prices and demand. While the recovery was a positive sign, it also gives us some idea of how long it can take before the economy bounces back.
The pandemic has thrown us all for a loop. Demand is decreasing and prices are falling leaving all of us concerned about our financial futures. However, it’s likely that history will repeat itself and we will all see a recovery. It’s just a matter of when….
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