Some property investors would think that rising sale volume means increasing demand, which will lead to good capital growth. It is a great start for increased demand. However, sale volumes in isolation is not as reliable as many believe.
Let us show you something. Caboolture (Postcode 4510) is a town in Moreton Bay Queensland where a large number of new developments are going on. The below chart shows the number of house sales each year from 2012 to 2021 in the area. By merely looking at it, you may think that the price must be climbing from 2012 to 2018 as buyers are flooding in, and as sale volumes go down from 2018 to 2020, the price must not have grown much because the market has “cooled down”.
However, the reality is…
Despite the rapid increase of sale volume from 2012 to 2018, price growth stays steady from 2014 to 2018, following a brief drop in the first year of this period.
How come the price didn’t go up substantially while the sale volume was surging?
Because the surging sale volume was companied by surging supplies (number of for-sale listings) instead of surging demands. The below chart shows the total number of listings each month from 2010 to 2022 of this area. The number of listings surges in 2010 (and perhaps in the previous few years as well) and stays at a high level through the following years to mid-2019. The house price trend only picked up when the excessive supply was absorbed.
The case of Caboolture proves that sale volume must be examined along with the number of listings. Then how do we look at them?
Theoretically, there are four types of sale volume – number of listings relations.
However, the four scenarios are not enough to describe their relations in the real world. For one thing, the actual number needs to be considered. For example, what if we have 100 new houses coming to the market this month and 90 next month, while there are 10 sales this month and 15 next month? Theoretically it falls in the “perfect scenario” where demands grow while supplies drop. However, the reality is that the demands cannot absorb the huge number of supplies, making it a bad scenario.
Ohh stop giving me more headache! – You must be saying.
So is there a simple way to understand the market pressure through sales volume and number of listings?
Yes, and it is the current number of listings to monthly sales volume ratio, which is what we call “Inventory”.
You can simply see it as “the number of months it takes to sell out the current stock”.
Now let’s see how the inventory can interpret the market.
There are two dimensions that we can look at the inventory: level and trend.
- Inventory >5: When there are listings on the market enough to sell for 5 months, we would call it a balance market, where it’s neither too hot nor too cold.
- Inventory ≤ 3:When the current listings can be sold in less than 3 months, the market should be highly sought after, and price could be pushed up by the high market pressure.
Unlike the sale volume vs. number of listings relations, there are only 3 scenarios to consider for inventory –rising, stable, and declining.
- Rising: Rising inventory is a sign of releasing market pressure. You might want to keep an eye on the market if the inventory keeps going up.
- Stable: If the inventory is stabilised at a low level, great! The market is likely to keep its popularity for some time; If the inventory is stabilised at a high level, it may not be a good idea to invest there.
- Declining:Declining inventory is a sign of accumulating market pressure, as it means demands are exceeding supplies. You may want to consider buying there (subject to further research and due diligence of course).
Now let test the above theory on Caboolture. This time we zoom into the last one year and a half where the greatest price growth occurred.
- The low level of inventory explains well why the price has been growing strongly during this period;
- If we divide the whole period into 2 halves in March 2021, you’ll find that the growth rate is higher in the second half (13.5% p.a.) with lower inventory levels than in the first half (10.3%).
Ensuring we review market demand from both a sales and listings level will always be key.
Inventory is a helpful indicator, however, it is one amongst many that we consider at InvestorKit when analysing market pressure.
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