Relationship of Demand and Supply

People have been talking about the limited supply of new flat units affecting the market prices. This statement should require careful examination.

Firstly, we need to look into what the meanings of supply and demand are.

Supply of properties is in the hands of property developers, government and property owners. The number of these people is small in comparing with the general public but the wealth of society is almost under their control. Their behaviour can be easily predictable as their aims are well known.

On the demand side, it is generally referred to public behaviour which is always changing to cope with latest economic development. Say, for living spaces, people could accept to live in very crowded shared flats in early 60s when Hong Kong was still in primitive development state. Public could hardly afford to pay for large apartments. At that time, one 200 sq.ft of public flat could accomodate up to 7 persons. The demand for new private units was scarce.

After the economic boom since 70s, more Hong Kong people were well off and they had strong desire to live in larger units which then drove up the demand for new flats. To match with such requirements, the boom of property markets had then started and the trend is still going on till now. Simply speaking, the demand is moving with economic development. Whenever there is a downturn, the demand for new flats will drop as people cannot afford expensive large units.

In a recession, no matter how you limit the supply, the demand drops faster than developers can predict. Same happens in a upward market but in a reverse direction, people have desire to upgrade the living standard and like to regard properties as assets which can earn money. Under such conditions, even with hugh supply, the demand will at most time outstrip the new flats as offered in the market.

This relationship of demand and supply had been fully reflected in our last downturn from 1998 to 2003. During this period, government and major property developers had been trying to limit supply but not be able to resist the declining trend of prices.

For investment in property market, we should place more attention on demand rather than supply. It is due to sole reason that demand as moving with economy is highly unpredictable which is major factor affecting the prices.