The real estate market is always changing. Inventory metric (also known as months of supply) is a major indicator of how healthy the market is in a suburb. The HtAG inventory levels measure the average number of properties sold per month over a year divided by the current stock on market.
This metric helps real estate agents to understand whether or not they can expect more buyers to show interest in their listings. It is also a great supply indicator for property investors looking to evaluate a real estate market before buying an investment property.
Recently there has been a decrease in inventory levels in real estate around Australia. Real estate agents believe that this is due to backed up demand caused by extended lockdowns. Returning expats are also creating additional demand not seen in previous years, which is exhausting the inventory levels much quicker than before.
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How to Interpret Inventory Levels?
Real estate agents frequently keep an eye out on the inventory metric in order to see if there’s been a recent increase or decrease. This allows them to predict demand for new listings. So how exactly do we measure the inventory levels?
Let’s say we have 50 listings this month and we have an average monthly sales volume of 25. We would call it a market with 2 months (50 divide by 25) of inventory.
Lower inventory levels mean that buyers are buying more properties than real estate agents are putting on the market. This is a good indication of an active real estate market, where property prices increase as demand exceeds the supply.
A higher inventory means fewer homes are sold. This can point to a real estate market that is less competitive, where properties remain on the market for longer.
The lower the inventory, the tighter the supply is in the relevant property market. The rule of thumb is that markets with 1 quarter (3 months) or less of inventory levels present good ROI opportunities for property investors. The capital growth metric of these suburbs is typically trending upwards.
The rule of thumb is that markets with 3 months or less of supply present good ROI opportunities for property investors.
Inventory levels can also shed light on market seasonality. In general, inventory levels rise during the spring when more homeowners list their properties, and they fall during the winter when real estate activity generally slows.
Changes in inventory levels can give investors insight into the market momentum. For instance, if inventory levels are consistently decreasing, it could signal that the market is heating up and prices might increase in the near future.
Remember, inventory levels can vary significantly across different suburbs and property types (houses, units, townhouses, etc.), making it more important to delve into suburb-specific or property type-specific data.
In addition, from a seller’s perspective, understanding inventory levels can help form pricing strategies. In a high inventory market, sellers may need to price competitively to attract attention away from the large pool of other listings.
Inventory Levels are a Lead Indicator for Price Movements
With the diminishing inventory levels, the Australian real estate market has become a sellers’ market in many capital cities and rural areas. Common questions among investors now are: “Is it worth waiting it out because prices have peaked? Or the prices will only increase from here on in, so there is no point in trying to ‘time the market’?”
The answer is: “It depends.”
There are sub-markets within markets. Even though the overall trend is up, there are always pockets of real estate that are either lagging behind the general trend, or in some cases moving in the opposite direction. As the inventory metric is a lead indicator for price movements, it’s important to measure whether it is increasing or decreasing compared to previous quarters.
Let’s illustrate the “multifacetedness” of the Australian real estate market. You will notice that inventory levels differ quite significantly across the country today. The chart below illustrates the inventory levels in Aussie suburbs country-wide.
Some suburbs have as low as 0.5 quarters (1.5 months) of inventory levels for houses. Red markers to the right indicate the 95% quantiles of the distribution. You should definitely avoid markets to the right of these red lines i.e. inventory levels of 2.5 quarters and above.
Summary
By using inventory levels, you can identify whether the market trends towards buyers or sellers. A high inventory level could indicate a buyer’s market, where buyers have more options and thus more negotiation power. Conversely, low inventory levels, signify a seller’s market, where high demand and limited supply can drive prices up.
Overall, while inventory levels are a significant factor in understanding the property market dynamics, they should be used in conjunction with other metrics for a complete market analysis and informed decision-making process. No single metric exists in isolation and the interplay between various factors shapes property market behaviours and trends.
To summarise here are the key points for real estate investors to take away:
- Inventory is the average number of properties sold per month over the past year divided by the current stock on market (SoM)
- HtAG measures the Inventory levels in months
- Inventory levels define how absorbent real estate markets are of new listings
- Can serve as a lead indicator for house prices, however…
- When inventory levels are high, real estate markets may be more susceptible to fluctuation
- Inventory level metric should not be used on its own
- Generally speaking, decreasing inventory is a good ‘buy signal’ for property investors
The inventory metric is a great place to start to assess the real estate market in a suburb or council area. However, as with all the other supply and demand metrics you should never rely on it in isolation.
Ideally you’d want to target suburbs with decreasing inventory with the current values below 1 quarter (3 months). However as with all the other supply and demand metrics, inventory levels should not be used in isolation and always cross-checked against indicators such as Stock on Market Percentage, Days on Market, Vacancy Rates and other metrics listed in the HtAG Data Dictionary.
To begin applying the Inventory Metric in real-life scenarios, download the latest suburb report from HtAG Digital Store today.
You’ve explained it well, Terry! As always, looking forward to more posts from you.
I am used to seeing inventory levels reported in months. Is there a reason why you chose to report it in quarters?
Not really an issue, as it just means that I need to multiply the htag inventory by 3 to get the monthly value. Interested to hear the rationale behind this.
Hi Jack.
All of our metrics are reported at quarterly interval, so it makes sense to report Inventory Levels in quarters.
We considered moving to monthly frequency, however the data for sales and rentals is too thin at that interval in many localities. This results in unnecessary ‘noise’ in the data i.e. it fluctuates up and down month on month.
You are absolutely correct in multiplying the quarterly Inventory by 3 to get the value in months.
We may consider introducing a separate column for Inventory (reported in months) in the near future. As you correctly pointed out, it is the de facto frequency used in the industry.
By way of an update, due to several requests we now report inventory levels in Months.
as you mentioned in blog that decreasing trend is good indicator. but your reports define inventory at point in time. is there a report that gives trends to see how inventory is over the year
Hi Muhammad,
The trend for inventory metric is available on every LGA and suburb dashboard. It’s the 2nd last graph at the bottom of the page in the Supply section.