In the good times when there is a huge demand for a particular resource, it’s human nature to get the sense that demand is limitless. But economic principles and history show us that this is never the case. When demand is strong, we tend to ramp up production and everyone gets in on it.
And then, just when we feel like we can't possibly keep up with demand, we reach the top of the mountain and the fall down the other side is much quicker than the hike to the top. Once supply outstretches demand, prices begin to fall, and panic ensues from overcapitalisation. Suddenly, everyone wants out and the domino effect is devastating.
Property is an asset just like any other. The economic principle of demand and supply still applies despite our tendency to believe that prices will keep going up forever. A recent example is Evergrande, the worlds most indebted company. When the property market was booming in China, prices kept going up and Evergrande kept on borrowing and borrowing to keep up with the demand. The mountain that just kept growing.
What goes up, must come down. Evergrande’s collapse catalysed by China’s new three red line policy may just be the tipping point for not only China’s real estate market but its entire economy.