Supply and demand is essentially a simple concept. If customers demand more cars producers make more cars. If customers demand more baked beans manufacturers produce more baked beans. It’s an age old proven law of commerce that’s supposed to keep supply and demand balanced and prices stable.
But in the property market things tend not to work like that. The normal rules of supply and demand don’t apply. And that tends to work in favour of property investors.
Here’s why builders will never be able to build enough new homes to meet demand …. and why it can make very good sense to buy into the supply of existing ones while you still can:
* There’s not enough land to go round to meet the current level of demand for new property …. let alone rising demand in future. And they’re certainly not making any more of it.
So OK, in the wilds of Scotland or Yorkshire there might be plenty of land. But the fact is that in most popular areas, where people really want to live and work, most of the ready developable land has already been built on.
* Planning permission for new housing developments is hard to get. Especially for large developments of several hundreds or thousands of houses. And, in truth, these are the only developments that can make any serious impact on housing supply.
Plus it takes time for new land to become available for development under the planning system. Land being identified for new housing now might not actually be built on for another generation.
Although there are some initiatives to address this situation, like Housing Zones, only time will tell whether these will have any real impact.
* Many new housing developments are vigorously opposed by local residents – the so-called NIMBYs and environmentalists. Especially (and paradoxically) in the more popular and attractive areas where more people want to live.
However well-intentioned these groups are the fact is they help keep supply down while demand soars.
* The process of development doesn’t favour large scale housing development as it did in the past.
Every new housing development needs a developer who is able to progress that development, fund that development and sell all the houses at a profit. Post-recession, when mortgages are still hard to come by, that isn’t easy. Most developers are still taking a cautious approach: It makes sense to develop a small number of houses which will sell readily, if at a higher price, than a large number of houses that might be hard to find buyers for at a good price.
* There probably aren’t enough builders to physically build all the new houses that are currently needed. In the last record year for housebuilding (2006) UK housebuilders only managed to construct 185,000 homes …. a figure that required virtual full employment in the construction sector and by ‘importing’ builders from abroad. That’s still far less than the number of new properties that need to be built to satisfy demand.
* It’s expensive to build new properties. Bearing in mind land costs, land remediation for brownfield sites, planning procedures (and appeals), construction costs (which tend to rise as demand rises) and so on it’s no wonder that new properties sell at a premium. Pound for pound older properties where these costs have been written down offer much better value …. but it’s impossible to build these older properties now.
So while, new houses will gradually come on stream to help swell the housing stock it’s extremely unlikely enough will ever be built to totally balance supply and demand. It’s likely that property will always be in short supply well into the future if not indefinitely, presenting an excellent opportunity for anyone able to buy or invest now.
You might find this Insider report useful: Making Money In Buy To Let. It’s Really All About Demand