Supply and Demand 101

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If you’ve been watching the news over the last month or so then you’ve no doubt heard about the fuel crisis in the UK, and the empty supermarket shelves. In Ireland there have been worrying grumbles about supply chain issues in the run up to Christmas. We’re told that the global supply chain is in crisis, but what does this actually mean? Where has this demand come from and how does it look when you apply it to Property and Real Estate?

To look at this properly we need to go back to March 2020. Uncertainty in the face of Covid-19 led to people saving more and spending less. Let’s face it, there wasn’t much to spend your money on – the travel industry shut down alongside all your favourite hotels, restaurants and gyms. Unless you were buying it on Amazon, you most likely weren’t buying much at all.

Cut to 18 months later and the world has reopened. People have been cautiously saving for the worst but as restrictions are lifted and the economy looks to be booming, it’s as if they’ve given a collective sigh of relief and decided to spend that lovely big savings pot they’ve built up.

Imagine a big bottle of cola that’s been shaken around. What happens when you open it? You have a big explosion. Coke everywhere. That’s what’s happening with the economy. It’s a very unusual form of economic uncertainty, because whilst many businesses are struggling, there are millions stored up in consumer savings. There’s a stampede of people rushing out to spend.

And what happens when there’s so much demand? Suppliers are forced to meet it and so they increase production. So they can do that, they need additional materials, and they start making big orders – materials, consumables: you name it, they’re ordering it. Their competitors (or other suppliers) see these increased orders being made and decide they need to get in on the act. 

This pushes everything into overdrive and that’s where we get into problems with the supply chain. Whether it’s ships, lorries, transporters, fuel increases, there are shortages everywhere and there is demand everywhere: it’s a totally unrealistic situation and it forces a response of people offering to pay over the odds.

Imagine you’re trying to complete your project and are told that prices have gone up – what do you do? You either have to wait it out to maintain your budgeted prices or pay more to get finished. I’ve noticed on my own sites that it can take 12 weeks at the moment to get deliveries that we could normally get the next day. It’s chaos.

Now let’s apply this to the property market. During the various lockdowns the property market stalled: building projects were delayed, estate agents couldn’t conduct viewings. However, the number of people out there who want to buy hasn’t changed. So as you come out of lockdown there’s huge pent up demand (remember the Coke bottle). The housing market has reopened but now there’s two or three times more buyers looking for the same property, and of course, that pushes up prices.

Big price jumps make new buyers (who are trying to get into the market) often panic: they’re getting outbid. After that happens a couple of times they start to get desperate, thinking they won’t be able to afford the house they were looking at last year, and that’s where emotions creep in. Not wanting to get outbid again, they start to bid more than everyone else. With 40 – 50 people bidding on a single property, we’re seeing homes going for well over the asking price (in some cases double).

And that’s not all. People sitting on the side-lines (who don’t need a property) are seeing prices rise and getting FOMO, thinking they should get into the market themselves. So that’s even more buyers continuing to push up prices. After 18 months of stagnation, the pressure has built up and now there’s a perfect storm going on.

This is where you need to take a step back and stop reacting. Think rationally about the situation. What happens after the Coke bottle has exploded everywhere? Give it 10 seconds for all the bubbles to die down, and what have you got? A flat drink – all the fizz has gone out of it.

In my opinion the same thing could happen in the property market. We have the current spike in demand, but that huge bubble in savings is going to get spent. Spending patterns will fall back to what they should be, demand is going to drop back to normal, and we can all get back to normal ourselves. So, don’t panic. Leave the fizzy drink to calm down before you try to open it!

I spoke about this in my training workshop this week. What’s your experience been – do you think I’m right, or do you have a different story? Let me know in the comments!