The Rewards of Understanding Scarcity in Property
NOTE: If you like this How to Video, you might also want to check out The Property Couch’s Episode 37 where Bryce and Ben talk about the Scarcity Scale and how Location and Property Type plays a part in a property’s value.
Hi Ben Kingsley here and today in our How To Session we are going to talk about the rewards of understanding scarcity. So as with any types of price setting, the scarcer the item usually means the more expensive it is. We talk about diamonds, rare vintage cars and all types of things and that there is demand for such things. When it comes to property, there is an absolute demand because we all need shelter. So we then need to understand how the scarcity component lace in between improving the capital value and yield because at the end of the day, we are looking to get the best return we possibly can out of our investment. So here is a group of different types of properties available in the Australian property market. Sure, there are more bedrooms and there are one bedroom houses but it’s a great little illustration in terms of what we are looking at. Now, what I’ve done is I’ve started with the least scarce item down the bottom.
So high rise and medium density accommodation doesn’t have that much scarcity value.
Usually when planning is put in place a number of apartments you can build up in the sky is sometimes unlimited. You can see here that usually it’s very easy to bring on lots of supply quickly so the scarcity value of this type of accommodation is low. Now, you might argue that 3 or 4 bedroom apartments are less in production or less quantity of them and that means that what’s going to happen is a little bit of scarcity there but ultimately, across the board there is low scarcity is this type of accommodation.
Then, we move up into flats. What I mean are flats and low-rise accommodations. We are talking about anything between 4 right through to maybe 10 or 12 depending on which city. In some cities, 12 units in a block is a lot but in some other cities like Sydney or even Melbourne, 12 is not that much at all. So we are talking about less scarcity here or higher scarcity, I should say. With these, you would also notice that some of these are on residential streets so they don’t have the capabilities of going high and so, there is some amount of scarcity associated with those. We’ve step up from really, sort of, mass volume into a bit more scarcity here.
Then, we move into townhouses and we start to think about the accommodation needs of people. What we are potentially looking at here in terms of scarcity is, they are not going to be mass produced in some areas. We would see duplexes, townhouses and those types of things coming into play and they have got some scarcity. Now, ultimately we then look at houses and you might think, “Wait a minute. There is not a lot of scarcity in houses when you think about all the greenfield and the new estate on the fringes of the city.” And you are absolutely right because there is no scarcity of land out there. You need to understand the concept of scarcity in terms of the location of that accommodation. So if you would have think logically, if that accommodation was closer in where the land is scarce and technically there is less and less of this type of accommodations, what happens to the value? It pushes higher, higher and higher. That’s the concept of scarcity. We do have some challenges around large amount of supply coming online for this type of accommodation but we also potentially have challenges up here in house and land packages in the outer suburbs and fringes where there is lots of vacant land. We can potentially build quite a lot of those really quickly as well. So the sweet spot of scarcity is potentially these types of accommodation up here such as beautiful character or lifestyle homes and better location so located closer into the city.
I hope that makes sense. It’s pretty logical and if you always think about supply and demand, we are talking about supply and we are talking about the scarcity of that supply and if you can take that into your thinking, you are going to be a better investor. I hope you enjoy this how to session.