The property market supply/demand quandary

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When you strip out economic events, sentiment and momentum the basic movers for any investment market are simply supply and demand. If there is more demand than supply then markets are squeezed higher but if there is greater supply than demand then prices are likely to fall. Sounds simple? So why has the answer to this quandary alluded governments and experts for hundreds of years?

Keeping demand ahead of supply

The trick to maintaining forward momentum in any investment market is to keep demand for assets ahead of the supply. This will ensure a healthy appetite from investors and the ongoing increase in asset prices creates a feelgood factor for those who already hold such assets. So, have governments been successful in keeping demand ahead of supply in the UK property market?

Chronic shortage of newbuilds

The UK authorities are not only tens of thousands of new build properties behind current demand but there is also a massive lag from years gone by. It would take a monumental investment by the UK authorities to rebalance supply/demand in the longer term, something which governments have failed to address. The simple fact is that for many people the investment in their home will be their largest lifetime investment. What better way to maintain a “feel good” factor than for them to see the value of their property steadily growing?

We are now at the stage in some parts of the UK where the chronic shortage of not only newbuilds but also “in demand” properties is pushing prices to unsustainable levels. However, is it really in the interests of the authorities to change this long-term trend of starving supply to the market?

Planning ahead is difficult

There are many factors to take into consideration when planning ahead with regards to newbuilds and the supply/demand seesaw. One issue is the fact that companies would need to invest hundreds of millions of pounds in the short term but only see any real return in the medium to longer term. We also have the problem of committing significant funds under the current economic climate only for this to change in the medium to longer term and potentially impact the expected return on investment and even the timescale.

There needs to be some kind of short term incentive for housebuilders to invest not only in the building of additional properties but also in an apprenticeship workforce today which will be fully qualified tomorrow. Yes, despite the fact that both the government and the building industry have been fully aware of the chronic shortage of new build properties in the UK there is also a chronic shortage of experienced workers.

Conclusion

No government has managed to perfect the art of tackling the supply/demand quandary in the worldwide real estate market. Not only is this a very delicate seesaw but economic variants change so quickly that what looks like a sensible move today may be simply wrong tomorrow. Therefore, it is highly likely that the UK market will remain short on new build properties for some time to come with the sector and the authorities maintaining an ultraconservative policy going forward.

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