Before you ever make an offer on an investment property, learn as much as you can about that property’s potential for capital growth. Amidst concerns about oversupply, investors can safeguard their financial outlook by carefully analysing properties before they buy them. Your analysis should include a number of factors, including the ever-helpful demand/supply ratio.

Assistant Governor Michele Bullock recently reported that the RBA is keeping an eye on oversupply, particularly in Brisbane and Melbourne. Oversupply has the potential to cause some trouble for financial institutions and individuals if real estate experiences an unexpected drop in prices.

According to current data, Melbourne has approximately 18,000 new apartments available as well as 17,000 new houses. The population is surging in the city, but some experts think the growing population won’t be large enough to fill all the new housing units.

And in Brisbane, some experts, such as Louis Christopher from SQM Research, suggest that there will be a surplus of 8,000 dwellings this year.

Oversupply statistics like these can cause concern among real estate investors, but what do they really mean for your personal finances and upcoming investment projects? Let’s take a look at ways you can protect your finances from problems associated with oversupply.

Calculate the Demand/Supply Ratio

The Demand to Supply Ratio (DSR) is a predictor of capital growth potential, and it can be very helpful to investors who want to purchase a property that brings healthy returns. The DSR is a score from 0 to 100 that helps investors to predict capital growth.

The higher the Demand Supply Ratio score, the more demand exceeds supply. Fundamental economics teaches us that prices rise when demand exceeds supply. By gauging both supply and demand, we can tell how much pressure there is on prices to rise in the future, and so we can predict how much capital growth a property has.

For example, a DSR of 30 out of 100 is “poor.” In studies, properties with a DSR over a score of 67 quadrupled the capital growth performance of properties with “poor” DSR scores. Hence, an effective investing strategy is to seek out investment properties with high DSR scores.

Calculating Demand to Supply Ratios is an essential part of your property research, and is just one of the ways we help investors avoid oversupply areas.

Look for Property in Areas Experiencing Undersupply

While some areas of Australia are experiencing the negative effects of oversupply, other areas are growing faster than housing can keep up with.

Many investors prefer to buy investment property near their own homes. This allows them to keep a close eye on their investment and be intimately involved with the property’s maintenance and management. If you live in an area experiencing oversupply, however, it may be in your best financial interest to seek for investment property elsewhere.

Are there areas of Australia where property investors can find capital growth opportunities in today’s market? Absolutely. AMP Capital chief economist Shane Oliver doesn’t believe there will be a national oversupply any time soon. Finding those precious undersupply areas and matching specific properties to your overall real estate investing goals is the key to strong capital growth for your portfolio.

Consider Your Overall Goals

If strong capital growth is your main investing goal at this point, oversupply could be a threat to your success. If, however, you want to buy and hold a property for a long time, the overall market fluctuations will likely absorb a rocky start.

Your age, your property investing strategy, your priorities regarding location, and your current financial situation should all be determining factors when it comes to choosing your next investment property. To discuss how we can help you to avoid oversupply areas in your next investment project, reach out to us at Full Financial Services.