Price Inelasticity of Supply in the Premium Residential Market

You may be wondering why are there still record breaking transactions from public housings when the property prices are on downslide since Q4 2013. Here is a key reason that resulted in a handful of public housing units sold above the million dollar mark (or close to). It is the price inelasticity of supply.

Price Inelasticity of supply
Price Inelasticity of Supply in Premium Residential Market

Let us recap the general economic rule that when supply increases, the price will be reduced eventually. At the start, due to scarcity of supply, the price will be relatively high as seller will do their best to push the market price as high as the buyers will bid for. In this situation, buyers are willing to pay the premium and this is the phenomenon of perfectly price inelasticity of supply. Thereafter, with this record selling price (a new price ceiling), it will entice more sellers to come in and hence shifting the supply to the elastic side. With more supply, the market will soon force the price down to an equilibrium; a reasonable market price. It is a free market.

You must have already heard of the recent record breaking public housing transactions. Just to name a few;

  1. $1,088,000 – Pinnacle @ Duxton, 5 Rooms
  2. $1,028,000 – City View @ Boon Keng, 5 Rooms
  3. $990,000 – Pinnacle @ Duxton, 4 Rooms
  4. $955,000 – Toa Payoh, 5 Rooms
  5. $900,000 – Clementi, 4 Rooms

These record breaking transactions happened only when the supply is perfectly inelastic, or at least in the eyes of interested buyers. When this happened, the seller then has upper hand in negotiating for a higher price.

Would I buy a property that has perfectly inelastic supply? Probably not worth spending that amount unless I have a really good reason for it.

Direction is more important than speed
Direction is more important than speed

Ask yourself, do you really need to buy that particular unit at this moment? Are there other similar units available?

In short, do understand your needs thoroughly especially when you are buying a property with perfectly inelastic supply.

P.S. If you have too many factors to consider, you may use this pairwise comparison matrix to identify your deciding factor. you can download it here or read more about it in my other post on the 3 stages of buying.

Pairwise comparison 3
Pairwise Comparison Matrix
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