Yong-Long Lai

When people talk about buying residential property, one of the first things to cross a person’s mind is “location, location, location”. Where is the best and right place to buy their next property? There is a very simple answer to this question and it makes sense because of the simple rule of supply and demand. Below we can see the 4 different outcomes for each combination of supply and demand.

Supply Demand Outcome

• high, high, price equilibrium (steady to strong market)
• high, low, falling prices (weak market)
• low, high, raising prices (strong market)
• low, low, price equilibrium (steady to weak market)

As property investors, we cannot control supply or demand for the entire residential property market, however we can choose a location of where to buy a property which have the forces of supply and demand tilted in our favor. For this to happen we need to understand the forces driving the supply and demand. To do this we’ll need to look at the location, location, location of properties in an area.

Most major cities are built with a central business district in the center, radiating outwards in a circular shape forming the outer city, the inner suburbs and the outer suburbs. For example, if a city had the following composition:

• inner city is up to 2km from the CBD
• outer city is 2-5km from the CBD
• inner suburbs is 5-15km from the CBD
• outer suburbs is 15-30km from the CBD

All residential properties are built on land, and land is determine by the area available

• inner cities are made up of around 12.57square kilometers of land
• outer cities are made up of around 65.97 square kilometers of land
• inner suburbs are made up of around 628.32 square kilometers of land
• outer suburbs are made up of around 2,120.57 square kilometers of land

To generalize, most infrastructures are built to service people to move them from the outer area to the CBD area for work and services. Hence, people are more likely to want to move as close to the CBD as financially possible, either renting or buying. i.e. the demand for property within the inner suburbs will generally be stronger than the outer suburbs, also the supply of new land within the inner suburbs will generally be a lot less than the outer suburbs as land is very scarce in the inner areas.

This simply means if an inner area property were to come up on the market for sale there would be approximately 2-3 times as many people from the outer areas who would want to upgrade and move in to occupy the property. Although every city is a different size, the driver of the supply and demand forces properties to remain the same throughout the world. So if you are looking to buy a property in an brand new development with vast empty land around you, you might want to stop and think about the forces of supply and demand before making your final decision.

As a property investor, you want to buy residential properties that will have the forces of supply and demand in your favor over the next 10-20 years or more. As the population grows, a city will expand and create many opportunities. This means a once unpopular inner area will turn out to be the next popular hot spot. If you’re still thinking about location, location location, then you’ll want to be shopping near the inner areas as both the forces of supply and demand will always be in your favor in the long run.