I’ve just seen this really interesting article on the BBC News Website which reports a RICS (Royal Institution of Chartered Surveyors) survey suggesting property prices will continue to increase over the next year because of the contracting supply of properties for sale.
I’m sure most of us understand that it’s a basic concept in economics that price is determined by the interaction of supply and demand.
So, if supply contracts, all other things being equal, price will increase.
But the key thing is that “all other things remain equal”.
And that means, mainly, demand.
But, demand isn’t just about the number of people who ‘want’ to buy a property.
Wanting to buy a property doesn’t create demand in itself.
There’s one other thing we need to be aware of which creates demand.
And without it, the number of people who ‘want’ to buy a property is irrelevant.
And without it, any contraction in supply is also irrelevant.
In my opinion this is the most important driver of house prices.
What is it?
It’s the availability of finance.
Or finance on the right terms.
It doesn’t matter how many people want to buy a property, but if they can’t get finance, there is no meaningful demand.
So, yes, it’s probable that contracting supply will push house prices higher, but we need to watch lending, particularly that banks are lending readily, and that interest rates are kept low and mortgage payments are affordable, otherwise we could see prices going in the other direction.
Here’s to Successful Property Investing.
(ex) Chartered Surveyor, author and property investor
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