why does oversupply cause crashes?

It is the old “supply and demand” curve, Investor. And that relates to everything, not just property. An over-supply leads to a drop in prices, and an under-supply leads to higher prices.

Do you recall Cyclone Yasi that took out huge swathes of banana plantations some years ago (2011?). Because of the disruption to what is a major part of Australia’s banana growing area, the price of bananas got (at one point) to around $12 a Kg. Everybody still wanted their bananas (the demand), but the supply had been cruelled by that huge storm. If you wanted the few bananas that were around, you had to pay more to get them. It took quite some time for the farmers to get new plants producing more bananas once again. Today, banana prices still fluctuate, but usually around $2 to $4 a Kg. If another Yasi came along, you can bet your house on the fact that banana prices would once again scream upward.

On to property, a current supply/demand curve that is “out of whack” and looking to head South is that of “inner-city apartments”. When supply was low, construction companies set about building more apartment towers. Back then, Chinese investors were buying up big-time, and the expected sales were huge. Since then, China has pulled back on its upward trajectory, the Fed Govt has introduced a kind of “overseas investor tax” that costs overseas investors huge extra $$ to buy in Australia ($50k or so?), and so the overseas apartment buyers have fallen away. Less demand for apartments that are yet to be completed (further increasing supply) sets that market way out of whack. The buyers disappear, and the prices will have to drop to find new buyers, so the construction companies will be able to stop paying mortgage interest.

Mining towns also saw crashes – the huge wages for mining crews attracted many to these little regional towns (e.g. Moranbah) and house prices soared as people moved in to get the big wages – but then, mining companies found they could “fly in and fly out” workers, house them in dormitories, and say “byebye” to those who had provided accommodation previously. The house values and rents dropped like a stone, and cruelled many investors who had been “riding the wave”. Now, you can buy property quite cheaply in many of those mining towns. An irrational boom, followed by a mandatory crash as the goalposts shifted!!

And the opposite side of the coin – not crashes, but tightly-held pockets where values can soar…. In areas that are “private school zones” the well-to-do might have to LIVE in the area if they want to send their children to a particular well-respected private school. If housing is limited in that area, and more parents want that school’s education for their young, then up go the prices of homes (demand is high, and supply is limited). A bit like the bananas really – pay more for them if you want them….

Benny

Additionally Chinese credit flowing out of China has been reduced with further reductions likely. An estimated quarter to third (depending on news source) of Chinese loans are fraudulent (the house or goods it is based on does not exist). With banks restricting mortgages to overseas buyers the buyer pool is reduced further. A restricted program of citizenship (from one year to four years) may also have an impact.
Banks are under pressure to lend responsibly by raising capital (savings) and reducing their loan book to ten percent of all loans to be interest only. Depending on the news source 30 to 60 percent of banks loan books have been interest only. Expect increases in rates and corresponding defaults as banks work to meet APRA requirements. A reduction in cheap credit should bring down prices in most markets.
The aging population myth will also impact as deceased estate sales are likely to grow in the next five to ten years and slam the market into over supply in my opinion. A reduction in family tax benefit and the single parents benefit should see rents go south too. Do your own research, this is my opinion based on my research.