Classic oversupply
21 Jun 2012

As I drove from Bangalore airport yesterday to the office district, I was struck by just how much building was going on. Now I worked in and around the docklands in London when it was going through its redevelopment, but the sheer scale of the development in India put that firmly in the shade.

Now as one of the BRIC (Brazil, Russia, India, China) developing economies you would expect to see mass expansion in India, but it got me thinking. Is it supply that creates demand or demand that creates supply?

Well if you stop and reflect on that for a moment it is potentially difficult to unravel, but I think it is possibly a moving feast that starts with a demand that some entrepreneur sees and is quickly followed by others who blow huge marketing budgets creating demand in those who didn't even know they had it in the first place.

This happens across the board from items as small as T shirts (take brands like Superdry, which lots of kids want to be seen in) to luxury waterfront apartments that promise both owners or renters a lifestyle beyond compare.

The problem is that almost as soon as things get popular they lose their exclusivity as over supply takes over. Just walk around your local town centre and count the Superdry labels, or look at many inner city apartment blocks at night and count how many lights are not on, suggesting that there is more supply than demand.

Now once this shift takes place and demand dries up, so clearly does supply and eventually equilibrium returns.

I think the UK property market is a good example of this, as despite severe economic conditions and a lack of confidence globally, property in desirable or short supply areas has faired well in terms of price. It always amazes me that for example in some parts of London house prices are now above what they were at the pre credit crunch peak.

This all leads me to conclude that long-term property prices in the UK can really only go one way. We are a small densely populated island and people will keep on doing what they have always done, for example moving with work, falling in love, starting families etc. Not to mention the fact that life expectancy seems to keep extending at rapid rates which will put less housing stock back into the recycling mix.

In larger countries and developing economies, I am not so sure though. I was surprised to read recently on the BBC website about Ordos, the biggest ghost town in China as the article described it. The huge building boom in China which has in recent years fuelled so much economic growth is clearly showing signs of slowing.

So is there anything we can learn from supply and demand? Well for me I think if there is lots of something and it is really popular it probably won't be for long is one thing, and the other is that everything goes in cycles. Sometimes quickly, sometimes over a much longer period (like the current economic downturn I suspect) and if your timing is good you are lucky and if it isn't it will probably come good in the end.

My kids have gone off Superdry now - I wonder what's next?