and when supply catches up? what happens then?
That's the weird thing about this current cycle. Usually, at the top of the cycle, builders go crazy building stuff, and the (in my view) inevitable bust means there is an oversupply. This is what we're seeing in many parts of the US: overbuilding and a sudden drying up of credit means many houses are sitting empty (the definition of oversupply).
What about Australia? Vacancies are very low. I have not heard of any forumites having much problems renting their places out, and usually lease renewals involve rental increases. Yet interest rates are going up, and it's possible we might have a recession in the US (which will impact us). If we're at or near the top of the cycle, we should be seeing oversupply by now. But we're not.
How can we explain this? The only reason I can come up with is that the last (current?) boom did NOT involve overbuilding. This couldn't have been because builders left profits on the table. More likely, there was less redevelopment allowed by councils, increased costs of developing greenfield sites, lack of new transport built (thus decreasing the attractiveness of developable land: if you build a trainline into an empty area, you bet the builders would be following you).
Sydney did have oversupply for a couple of years, but after the market peaked around 2003, the oversupply was eaten up by rental demand.
In this market, I'm predicting falling prices and rising rents. The rise in rents will be exacerbated by the fact that prices are falling: less investor demand (their objective being, as we know, capital gains) means even fewer IPs out there. A recession may decrease demand as people, for example, share properties or move back in with the parents, but that's where property selection becomes significant. e.g. I avoid big buildings catering to yuppies.
In short, YM, supply is unlikely to catch up with demand. Why? You need a boom to create supply, much less oversupply. If we have a period of stagnating prices, which will probably result from a liquidity squeeze as we're seeing being played out overseas, supply WON'T catch up.
Result: falling prices, rising rents. That can't happen forever either, so what then? You get to a point where rents are high enough to entice investors back into the market, and renters decide to buy instead. That increases the supply of IPs AND decreases demand for IPs. Note the flip side: decrease in rental demand, assuming the population is equal, increases BUYING demand. So you have an increase in prices.
Putting it even more simply: you have a bust, a number of years when the market is stagnant or falling but rents are rising (which rents are willing to pay because prices aren't going up so they have no incentive to buy) until it tips over the other way. People start buying again, and the weight of the pent-up demand during the down years creates another boom.
The bust is coming, but it will sow the seeds of the next boom.
Alex
