Should We Worry About Prices Now That Supply For Houses Is Rising?
A basic economic concept taught in schools is the law of supply and demand. In case you’ve forgotten, Investopedia offers a simple explanation on the concept- if there is a low supply and high demand the price will be high; in contrast, the greater the supply and the lower the demand, the lower the price will be.
Currently, UK house prices are still on the rise. The Office for National Statistics reported last November that property prices rose by 6.1% from January to September 2015.
If we are going to follow the law of supply, do high property prices mean that there is still high demand and low supply in houses? It’s a big fat N-O.
Kate Allen from the Weekend Financial Times, shares that the number of newly built houses in the UK is actually higher than the reported figures, thus creating a misleading scenario that supply for new houses in the UK are still lacking.
In 2015, more than 155,000 homes were built in the UK. However, previous government estimates only pegged the number at over 124,000.
The same phenomenon is also experienced in London. There are more than 24,000 newly-built homes in London, despite the initial forecast of only 18,000.
It’s not just newly built homes which are contributing to the increased supply of houses in the UK. The number of dwellings also increased with the rising conversion of commercial properties into residential housing. So far more than 20,000 new homes are created under this strategy, but the at the cost of closing some established business.
Allen said that landlords are asking even their long-term clients to close up shop, because landlords are lured by potentially higher yields when they convert their properties for residential use.
So what happens now that supply is slowly catching up to market demand? Will this mean that there will be a flood of cheap houses for sale in the UK like the one experienced in 2008?
Honestly, I’m also not sure where the current market conditions will lead property prices, but what I’m sure of is that we all have to be prepared for any changes.
I was listening to one of Rick Otton’s podcasts a few days ago and he gave a refreshing perspective on property prices in that episode.
“Most people can say that the property market is going up or down but where it’s actually going – we don’t know. No one knows. What I’m sure of is that when we hit bottom, we go up again, and then go down,” Mr. Otton said.
He added: “I don’t think anybody really knows that exact value of anything at the moment. When people ask me what is the market price. All I say is that – it’s what anybody is prepared to pay for it in this market.”
And this is true. At the end of the day, statistics are just an overview of trends (which can vary from area to area). What affects you is what your clients are willing to pay for what you offer (whether you’re selling the house or letting it). So rather than obsess with what you can’t control (supply and demand trends), it’s always better to focus on the things you can control – which is identifying the needs of your client and offering the best solution to their need. Remember, people are willing to spend money on things they feel are worth it. So as an investor, your question to yourself is “how do I make my property worth it?”