While property has always been a very popular investment it has grown in popularity recently with low interest rates and low inflation. Over the last few years much of the emphasis on investing in property has been on capital growth but as markets potentially run out of steam there is more focus on rental income as part of a long-term investment strategy. However, governments around the world have the very tricky task of finding a balance between supply and demand in the property market.
So, what are the challenges facing governments and why is it important to balance the supply/demand ratio?
Maintaining forward momentum
We only need to look at the UK property market to see how property prices have increased dramatically over the last 30 years. This is a market which, in the eyes of many, has suffered from a chronic shortage of new builds which has seen the price of existing property pushed higher and higher. This has worked well for those owning their own property, with many crystallising often life changing gains, but the government in the UK is coming under greater pressure to release more new builds. However it will be a challenge to balance demand for new builds with the need to maintain current property price momentum going forward.
Are new builds important?
New builds are a vital element of any property market because very often they are the first stepping stone for those looking for their first property. If you look at the statistics for the UK property market, as an example, you will see that there is a significant jump for those looking to climb onto the property ladder via the acquisition of existing properties. This is where new builds come into play with many targeting first-time buyers who will then be able to climb onto the ladder and hopefully move up in years to come.
First-time buyers are the lifeblood
First-time buyers are literally the lifeblood of any property market because they allow those towards the bottom end of the property market to sell their homes and potentially move on to the next level. Those at the next level are able to sell their properties and the chain reaction continues right up to the top of the property market ladder. If property markets are starved of first-time buyers then this limits the ability for those towards the bottom end of the market to sell their properties and can lead to stagnation.
One side-effect of relatively low newbuild numbers is an increase in demand for rental properties which encourages buy to let investors to enter the marketplace. The problem here is that as more people look to rent property, more buy to let investors acquire property then this pushes property prices higher and higher. In what can fast become a vicious circle, rising property prices attract more demand for rental property which in turn attracts more and more buy to let investors and the chain reaction continues.
Governments around the world will need to release more newbuild properties in the short, medium and longer term to add an extra step for those looking to move onto the property ladder. It is okay starving markets of new builds to keep property prices higher in the short to medium-term but it is the long-term situation which is more of a worry. First-time buyers are literally the lifeblood of any property market and if they disappear there can be repercussions.