One of the fundamental elements of economics is the relationship between supply and demand. We are seeing this played out in the current Melbourne and Sydney markets. But beyond this things aren’t always so straightforward. Many factors complicate supply and demand.

One complication affecting the supply side is the cost of transactions — a leading cause of housing undersupply. While housing values have risen dramatically in the past 20 years, the ratio of agents’ fees and taxes have stayed the same — meaning the rise in transaction costs is equally dramatic.

This is scuppering the plans of owner-occupiers looking to upgrade. Facing crippling transaction fees, many owner-occupiers are now holding and renovating instead of selling and moving. This is unfortunate, because there’s plenty of demand in the residential housing market, especially from investors. Based on mortgage originations, we know that the number of residential investors is outweighing that of owner-occupiers in some areas.

But the rising cost of transactions makes the game harder for owner-occupiers and investors alike. There’s no sign of this changing, so under these conditions, it’s important to buy when a good opportunity presents, because increasing scarcity means these costs are only set to rise further. There’s no question that investors can still do well under these conditions if they make careful choices with the right calibre of property.

Until next week,

Jock Bing