Inventory Levels – The Ratio of Properties Sold to New Listings

The real estate market is always changing, and the inventory metric is a major indicator of how healthy the market in your area is. The HtAG inventory levels measure the number of properties sold over the past 4 quarters 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 due to backed up demand caused by extended covid lockdowns. Returning expats are also creating additional demand not seen in previous years which is exhausting the inventory levels much quicker than before.

So how exactly do we measure the inventory levels?

Let’s say we have 50 listings and we have an average quarterly sales volume of 50. We would call it a market with 1 quarter (50 divide by 50) of inventory.

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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.

  • 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 real estate agents have to compete for listings and property prices increase as demand exceeds the limited supply.
  • A higher inventory means fewer homes are sold. This can point to a real estate market that is less competitive where properties remain listed for a longer time without the buyer agiotage.

The lower the inventory, the tighter the supply is in the relevant property market. The rule of thumb is that markets with 1 quarter or less of inventory levels are good selections for property investors. The capital growth metric of these suburbs is typically trending upwards.

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 most 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, so 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.

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.

Let’s illustrate the “multifacetedness” of the Australian real estate sub-markets. 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.

Inventory Levels in AUS suburbs
A significant number of suburbs have inventory levels of 1.5 quarters and below for houses

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

To summarise here are the key points for real estate investors to take away:

  • Inventory is the number of properties sold over the past four quarters divided by the current stock on market (SoM)
  • HtAG measures the Inventory levels in quarters
  • 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, but as with all the other supply and demand metrics you should never rely on it in isolation. Always cross-check against other indicators such as Stock on Market Percentage, Days on Market, Vacancy rates and others listed in the HtAG Data Dictionary before making any decisions about suburb selection.

To begin applying the Inventory Metric in real-life scenarios, download the latest suburb report from HtAG Digital Store today.

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