Apartment oversupply can now be measured.
Looking at the number of apartments ‘for sale’ in a suburb simply doesn’t say much. For example, if Southbank in Melbourne has 368 apartments for sale is this too many? What if it jumps to over 400 the following month? Is it too many? What if, at the same time, the neighbouring suburb, South Melbourne, also had over 400. Do you take this into the oversupply equation for Southbank? How about if an apartment complex has 17 apartments for sale within the building. Is this too many?
The problem and fact is, because these numbers aren’t measurable against anything, the answers subjective. Many people and professionals will state an oversupply issue because those numbers appear high for an asset class without scarce features.
We can now measure the number of apartments for sale against the total number of apartments in the complex at address level. This provides a real time account of apartment supply as a percentage. Plotted on a map, we can see where supply is high and low for every apartment complex.
However, this can still be deceiving as we’re not considering demand. For example, let’s look at two apartment buildings (Building A, and Building B). Building A has 16% of the building for sale. Building B has 4% of the building for sale. Clearly Building A has more supply.
It’s not until we factor in consumer desire that we get a true indication of over or under supply. We look at the Absorption Rate to measure consumer desire. The Absorption Rate looks at how many apartments have sold over a time period in conjunction with how many apartments are for sale. The answer tells us how long it would take before we ran out of apartment stock.
Building A has an Absorption Rate of 5 months (5mths before all apartment stock’s absorbed). Building B has an Absorption Rate of 7 months (7mths before all apartment stock’s absorbed).
|Building A||16%||5 mths|
|Building B||4%||7 mths|
In conclusion, Building B is more oversupplied than Building A despite Building A having more supply. Quite simply, this is due to consumers demanding apartments in Building A at a faster rate than Building B.
We can take this further and measure supply and demand of other apartment buildings in each suburb to achieve comprehensive over and under supply insights. The insights gained can be used for many important reasons, not just for the property industry.
When it comes to supply and demand looks are deceiving. It’s not until we drill down that the truth comes out.
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