Supply and Demand in Property Markets

Market Segmentation and Sub-markets

• Market segmentation involves dividing the property market into sub-markets or segments based on specific criteria, primarily use and geography.

• Property Use Classifications:

  • Residential: House, Townhouse.

  • Office: Prime, Secondary.

  • Retail: Food, Department store, Discount store.

  • Industrial: Manufacturing, Transport.

  • Leisure: Hotels, Sporting facilities.

  • Land: Commercial, Residential.

• A sub-market consists of substitutable properties that respond to external factors in a similar way.

• The concept of segmentation is vital for property analysis. A property career built on sub-market knowledge typically involves valuation or investment advising.

• The median house price for Greater Perth is often considered relatively meaningless for local housing sub-market analysis because it aggregates diverse segments that do not move in unison; local factors drive specific sub-markets differently.

Global Rent and Price Variations

• Prices within a specific sub-market should ideally be similar, driven by specific demand factors.

• Most expensive cities for property purchase in 2023/2024 include Hong Kong, London, Tokyo, and Sydney (noted as being in the top tier).

• Comparison of residential rental costs:

  • Sydney: Approximately $AU750/week$ ($US488/week$ or $US1952/month$).

  • Perth: Approximately $AU640/week$ ($US416/week$ or $US1667/month$).

• Prime office space occupancy costs are ranked globally based on US dollars per square foot per annum (Q4 2025 data).

• Global real estate investment is often ranked by residential yields, highlighting the most profitable markets for investors.

Real Estate Space and Asset Markets

• The property market is split into two distinct but interconnected aspects:

  1. The Space Market (The User Market): Real estate viewed as space for usage. The occupiers are typically tenants. Demand is driven by users (owner/renters) for the right to use the property.

  2. The Asset Market (The Capital Market): Real estate viewed as an investment asset. This includes direct and indirect investment (e.g., AREITs). The participants are investors (landlords). Demand is driven by those seeking investment returns and property cash flows.

• Relationship between markets:

  • Rental rates are determined in the Space Market.

  • Required yields (Capitalization Rates) are determined in the Capital Market.

  • The interaction of property cash flow and required returns determines the Value ($V$) of the property.

• External Influences:

  • The Economy at Large: Global, national, regional, and local economic conditions affect both markets.

  • Government Influence: Local (land use controls, property tax), State/Federal (regulations, financial regulations, income tax), and construction costs/savings affect value determination.

Demand for Property

• Demand and supply analysis is essential for valuations, development, investment advice, and lending decisions. It helps predict future property performance.

• Endogenous variables in the User Market:

  1. Rents and Prices.

  2. Vacancy rates.

  3. Net absorption (the change in occupied space).

• Asset Market indicators:

  1. Capitalization Rates (Yields).

  2. Portfolio exposure and changes.

• Demand indicators signal current activity in the user market, which feeds into the asset market to determine potential returns for the supply of space.

Determinants of Housing Demand

• General Market Factors:

  • Macroeconomic conditions: Unemployment, interest rates, consumer confidence, and population growth.

  • Household factors: Income, job stability, and family situation.

• Property Specific Factors: Location (proximity to sea/features), physical characteristics, neighborhood quality (schools), accessibility (transport), local services (shops, health), crime rates, open space, investment returns, and affordability.

• Relationship with Interest Rates:

  • An increase in interest rates decreases demand for owner-occupation.

  • A decrease in interest rates increases demand for owner-occupation.

  • An increase in interest rates typically increases demand for rental properties because mortgage accessibility decreases, making rental an "inferior" good (in economic terms) to which consumers switch.

• Impact of an interest rate rise on owner-purchaser housing market:

  • The demand curve ($D$) shifts left to ($D_1$).

  • The equilibrium price ($P$) falls to ($P_1$) and quantity ($Q$) falls to ($Q_1$).

• Impact of an interest rate rise on rental housing market:

  • The demand for the inferior good (rental) increases.

  • The demand curve shifts right to ($D_1$).

  • Rent ($R$) increases to ($R_1$) and quantity demanded/supplied ($Q$) increases to ($Q_1$).

Income and Population as Demand Drivers

• Income Elasticity:

  • Normal Goods (Owner-occupation): Increase in income leads to an increase in demand. On a graph, an increase in income for a normal good shifts demand from ($D$) to ($D_1$), increasing quantity from ($Q$) to ($Q_1$) at price ($P$).

  • Inferior Goods (Rental sector): Increase in income lead to a decrease in demand. On a graph, an increase in income for an inferior good shifts demand from ($D$) to ($D_1$), decreasing quantity from ($Q$) to ($Q_1$) at price ($P$).

• Population Definitions (ABS):

  • Household: One or more persons, at least one of whom is at least 15 years old, usually resident in a private dwelling.

  • Family: Two or more persons, at least one of whom is 15+ years old, related by blood, marriage, adoption, etc., usually resident in the same household.

• Population Growth in Western Australia (2024):

  • Estimated resident population: $2.97 \times 10^6$ people.

  • Year-on-Year growth to June 2024: $2.8\%$.

  • Natural increase: Approximately $13,500$ people.

  • Net Interstate Migration (NIM): Approximately $9,700$ people.

  • Net Overseas Migration (NOM): Approximately $58,000$ people (major contributor).

• Population impacts on prices:

  • If supply is instant (perfectly elastic): Quantity increases without a change in price.

  • If supply is quite elastic (responds quickly): Quantity increases with a small increase in Price ($P_1$).

  • If supply is inelastic (responds slowly): A shift from ($D$) to ($D_1$) results in a large price increase to ($P_1$) with only a small change in quantity ($Q_1$).

Supply of Property

• Two types of supply exist:

  1. Housing Stock (Existing Dwellings): The total number of private dwellings.

  2. Housing Flow (New Dwellings): New completions minus demolitions (Net additions). Demolitions in Perth are estimated at roughly $2,000$ per annum. Completions usually account for approximately $3\%$ of the total stock per year.

• Greater Perth Housing Stock (2021 Census):

  • Total private dwellings: $882,375$.

  • Separate houses: $77.8\%$.

  • Semi-detached/townhouses: $14.2\%$.

  • Flats/units: $7.6\%$.

  • Other dwellings: $0.3\%$.

• Supply Characteristics:

  • Supply is inelastic in the short term; it cannot respond immediately to demand shifts.

  • New land cannot be created; it must be zoned and allocated.

  • Refurbishment is the fastest traditional supply response, though still slow.

  • Large-scale supply requires many years to implement.

• Stock and Flow Equilibrium:

  • Price ($P$) determines profit. If Price ($P$) is greater than Cost ($C$), development is profitable, leading to housing starts ($HS$).

Measuring and Planning for Supply

• Key Data Sources:

  • UDIA: For residential lot approvals (final and conditional).

  • Listings: Number of established homes for sale or rent.

  • HIA: Data on new homes.

  • ABS: Dwelling commencements, building approvals, and housing finance (loan approvals).

  • State Treasury: First Home Owner Grant data.

  • HIFG (Housing Industry Forecasting Group): Reports on supply trends.

• Planning and Zoning:

  • Metropolitan Region Scheme (MRS): Designates land as Urban or Urban Deferred.

  • Town Planning Scheme (TPS): Specific residential and commercial zonings (e.g., General industry, Town centre).

Sources of Supply: Greenfield vs. Brownfield

• Greenfield Development (e.g., Ellenbrook):

  1. Undeveloped land identified in strategic planning.

  2. Land zoned for residential development.

  3. Land subdivision creates new lots.

  4. Lots purchased by households.

  5. Project homes constructed.

  6. Addition of housing unit to stock.

• Brownfield Development (e.g., Subiaco Centro, East Perth):

  1. Previously developed or vacant site within urban area identified.

  2. Land zoned for medium/high density residential.

  3. Developer purchases land and constructs dwellings.

  4. Apartments purchased/pre-purchased.

  5. Addition of new units to housing stock.

Alternative Sources of Supply

• House and land packages.

• Social housing (Public and Community housing).

  • Specialist Disability Accommodation (SDA).

  • Government Regional Officers Housing (GROH).

• Temporary accommodation.

• Speculative development.

• Contracts for specific development.

• Co-ordinated redevelopment (e.g., DevelopmentWA).

Questions & Discussion

• Question: Why is the median (Greater) Perth house price relatively meaningless when analysing local housing sub-markets?

• Answer: Sub-markets are defined by substitutability and similar responses to external factors. Greater Perth is too broad and contains multiple sub-markets that do not share the same supply/demand dynamics.

• Question: Does the traditional method of land and housing supply in Perth protect the market from oversupply, or add to affordability problems?

• Discussion Point: This involves examining whether slow supply responses (inelasticity) and planning regulations act as a "handbrake" that increases prices for first-time buyers or prevents the price crashes seen in international markets.