Property Scarcity and Price – Part 1

Scarcity is the difference between limited and unlimited, and is one of four factors that work together to make something valuable along with desire, utility and purchasing power. Scarcity is fundamental to the supply side of the equation, and has both a current and future outcome on property prices.

For anything to have a degree of value it must have a degree of scarcity, but it’s having an understanding of what creates and influences it that allows the ability to make better property decisions.

According to Geoscience Australia, mainland Australia consists of 7.65 square kilometres of land. This suggests land is abundant, the problem is most of it holds little utility, and scarcity and utility are closely aligned.

A couple of examples include a ball point pen from the local newsagent. It has a small degree of scarcity because it has utility, however a limited addition handcrafted gold nib engraved pen holds a higher degree of scarcity. Both pens share the same utility, yet they have different price points due to the limited number of pens available. The air we live and breathe has utility for every living thing, however air has no scarcity and therefore has no economic value. An exception here would be an astronaut or cave diver whose oxygen level is low.

Land is a fixed resource all over the world. A supply curve for land would be a vertical line (perfectly inelastic). The same applies for locations where no further land is available such as inner suburbs. The land for these suburbs remains utilised. Increases in demand has no effect on increasing supply because no further land can be added. This is the key to scarcity and a viable reason why it’s one of the 4 factors that make land valuable.

However, in a market, land is transferable e.g. sold to a buyer, so the amount of scarcity for land at any given time can increase or decrease and therefore so can price.

Scarcity becomes more intriguing when considering the improvements to the land e.g. a dwelling. This is because dwellings are configured differently. Everything adds to scarcity – architecture design, materials, bedrooms, bathrooms, tap finishes etc. Many items used in pre-World War 2 homes either don’t exist anymore or remain uneconomical which only adds to the supply factor. But does this mean you should buy a Victorian or Edwardian house?

Click to read part 2 of our property scarcity series.


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