Australia's Housing Affordability Crisis

This assignment analyzes the reasons behind Australia's escalating housing prices, focusing on supply-side constraints imposed by land utilization regulations, bureaucratic delays in construction approvals, and development contributions. It argues that the government plays a crucial role in mitigating this crisis through infrastructure improvements, relaxed land use policies, streamlined approvals, and reduced development charges to ensure a more affordable housing market for Australians.

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By (Name)
Name of the class (course)
The Course instructor (Professor)
The Institution
The City and State location
The Date

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Introduction
The article “Put the house price myths out of pasture” by Allan Moran on July 23rd, 2007
articulates the reasons behind high prices of houses in major Australian cities like Melbourne and
Sydney. According to this article, the rise in home prices is caused by supply-side factors. There
exist numerous factors in state and local governments that are hindering the delivery of new
dwelling units in Australia. The shortage of land resulting from government actions is one of the
factors impeding the construction of additional houses. For example, in New South Wales,
scarcity of land has reduced the building of new homes by 40 percent. Other supply constraints
in Australian housing market include taxes by local and state governments as well as insufficient
infrastructure or high land development costs. Allan Moran is confident that if these factors are
addressed, then the price of homes in Australia will be normalized and help to solve the housing
affordability crisis. I agree with the arguments presented in this article regarding the conditions
in Australian housing industry.
Economic Analysis
Supply of Homes
Supply is an essential component of the market forces. Therefore, changes in supply will
have an impact on the market prices. In Australian housing market, the delivery of homes has
been curtailed by several factors. Foremost, land use restriction policies imposed by the
government have reduced the land available for construction of dwellings (McLaren et al., 2016,
p.42). The compliance costs of such plans also increase the cost of the building. The
development contributions imposed on houses by the state and local governments also increase
the expenditure involved in the delivery of homes in Australian housing industry. Additionally,

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poor and inefficient infrastructure impedes activities in the housing market. Vital infrastructures
like water, drainage, roads, and sewerage are either insufficient or missing (Rahman, 2010,
p.582). Such scenario discourages potential property developers from entering the market. In
case these infrastructures are incurred by the property developers, then the cost is passed to first
home buyers through higher prices. As a result, these factors have scaled back the supply of
homes in Australian housing industry.
Figure 1: Decline in Supply of Houses
Price
Number of homes
The drop in the provision of houses in Australian housing industry is exhibited by the
change in supply curve from S2 to S1. The shift causes the number of homes supplied to reduce
from Qe to Q1. Insufficient dwellings will cause the price to shoot up. On the figure one above,
this scenario is illustrated by the increase in price from Pe to P1.
Market Efficiency
The functioning of the market often results in benefits to both consumers and the
producers. The consumers benefit from consumer surplus whereas the producers gain from the
P1
Pe
S2
D
QeQ1
H
T
S1

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producer surplus. Consumer surplus denotes the variation between the price the client is prepared
to pay for a commodity and the actual price incurred. On the contrary, producer surplus is the
marginal price of generating a product less the price received (Sexton, 2015, p.81).
Figure 2: Producer and Consumer Surplus
Price
Quantity
When there is no shortage in Australian housing market, the equilibrium takes place at
point W where the equilibrium price is denoted by Pe while Qe represents the equilibrium
quantity. Producer surplus is represented by the area under the equilibrium price and above the
supply curve, that is, the area marked PeWN. On the other hand, consumer surplus is exhibited
by the area above the equilibrium price and under the demand curve, that is, PeKW.
Consumer and producer welfare in Australian housing industry
Supply
Demand
K
Pe
N
W
Qe

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The demand in Australian housing market outstrips the supply. The result of this situation
has been higher prices which are beneficial to the suppliers and detrimental to the consumers.
Therefore, the producer surplus has increased while that of the consumer has declined
significantly.
Figure 3: Increase in the Surplus of the Producer
Price
Quantity
The rise in demand for dwellings is shown by the shift in demand curve from D1 to D2.
The equilibrium point changes from W to J causing a change in the equilibrium price and
quantity. The increase in the price of homes increases the welfare of the property developers
while that of consumers decline. The additional welfare the producer receives from the price
increase is shown by area marked CJPeW. Area marked CJL demonstrates the new producer
surplus. In this scenario, the consumer losses while the property developers in the housing
industry benefit.
S
D1
C
Pe
L
W
Qe
D2
J
Q2

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Market Failure
When the free market does not generate an economically efficient result, then market
failure takes place. Such scenario indicates that there is an inefficient allocation of the limited
resources (Mankiw & Cosgrove, 2014, p.54). The housing sector is usually characterized by
different types of market failures. For example, high prices for homes results in affordability
crisis for the low and mid-income groups in the society. Other market failures in this sector
include environmental costs emanating from new homes as well as social issues created by poor
quality shelters (Davidson, 2016, p.34). Such problems have severe consequences on the entire
economy especially when the wellbeing of the citizens is endangered. Many individuals are
likely to become homeless while others reside in substandard shelters. Furthermore, vital public
sector workers cannot afford to live near their locations of work, and such issues could result in
lower labor productivity (Rowley et al., 2015, p.474). The level of unemployment in a country
will also increase as private sectors find it difficult to hire those individuals who cannot manage
to reside near workstations.
In Australia, the market failure in the housing industry has resulted in housing
unaffordability for low and mid-income families. Reduction in the supply of homes and
continued increase in the demand has made the prices of homes to grow significantly (Dufty-
Jones & Rogers, 2016, p.36). As a result, those individuals whose income is low have a difficult
time in finding a place to reside. Some end up in substandard dwellings which are not conducive
to their wellbeing. The escalating rents worsen this issue, and thus individuals are left with
limited choices. Also, studies show that there is some form of government failure in the housing
industry. Government actions in the housing industry have helped to worsen the affordability
crisis instead of providing a solution. For instance, negative gearing and tax concessions on

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housing have resulted in speculative activities (Haslam McKenzie & Rowley, 2013, p.54). The
investors buy and hold houses in anticipation for capital gains on the resale. Apart from exerting
pressure on houses, they also deny first home buyers a chance to get houses at a lower price.
Proposed Changes and Their Impacts
The high price of homes in Australian real estate market is a form of market failure that
requires urgent attention. Addressing this issue is vital to the well-being of Australians and also
the entire economy. For example, when individuals can afford to stay near the work locations
their work productivity will improve and hence the revenues of the companies (Khezr, 2015,
p.492). The comments and proposals presented in the article titled “Put the house price myths out
of pasture” can help address the escalating prices of homes in major Australian cities. The
proposed plans include sufficient land release, reduction of government charges, minimal red
tape, and infrastructure development.
Greater Land Release
The land is a significant factor in the supply of houses in a country. When this resource is
inadequate, then the construction of dwellings is curtailed to a great extent because the cost of
constructing new houses increases. In Australia, the shortage of land for construction results
from government land use policies. Researches show that Australia has one of the rigid land
utilization policies in the world (Barry, 2017). Therefore, if such regulations are relaxed, then
more land will be available to facilitate the building of additional residential houses. Moreover,
the compliance costs will be lower and thus act as an encouragement to property developers.
Reduction of Government Charges

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The local and state governments in Australia levy taxes in the form of development
contributions. These charges increase the cost of construction (Yates & Berry, 2011, p.134).
Usually, increase in cost of production results in a drop in the supply. There is a need for the
government to reduce or eliminate some of the taxes to lower the cost of doing business in
Australian housing market. Such efforts will attract new developers in the market and also make
homes more affordable to the consumers (Haslam McKenzie & Rowley, 2013, p.383).
Reduce Red Tapes
Bureaucracies are known to impede business operations especially when there are
excessive. The red tapes do not only waste time but also increase the cost of conducting
businesses. In Australia, there are a lot of procedures involved in approval of construction plans
a scenario that delays the provision of new homes (Dufty-Jones & Rogers, 2016, p.44). Hence,
the government should consider reducing or eliminating unnecessary red tapes to speed up the
construction plans. This action will help to reduce the time and cost used in the building process.
Infrastructure Development
Infrastructure is vital for the proper operation of the housing sector. Good infrastructure
provides an enabling environment and hence can act as an incentive to property developers to
increase their activities in the market (Gurran & Phibbs, 2013, p.389). In Australia, land
development costs are mostly incurred by private property developers. This situation reduces the
number of homes being constructed and also makes them expensive as the buyers bear land
improvement expenditures. This problem can be solved if the government of Australia takes an
active role in the development of critical infrastructures such as roads, water, drainage,
electricity, and sewerage. Better roads, social amenities, and other essential facilities increase the

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supply of suitably situated land for construction of new dwelling units (Dufty-Jones & Rogers,
2016, p.52). Furthermore, good infrastructure will also eliminate the need for passing extra costs
to the purchasers through higher prices.
Figure 4: Increase in Supply of Homes
Price
Number of homes
If the policies mentioned above are implemented, then the delivery of new houses in
Australia will increase to respond to the escalating demand. The escalation in the number of
homes is demonstrated by the shift in the supply curve rightward from S1 to S2. Consequently,
the equilibrium point changes from T to U. The number of dwellings increases from Q1 to Q
while the price falls from P1 to P. At a lower price, the majority of individuals will afford to
acquire housing units.
Conclusion
The escalating price of homes in major Australian cities results mainly from the supply-
side factors. Foremost, vital infrastructures such as roads, water, sewage, and drainage are either
insufficient or poorly developed in most parts of the cities. Such unfavorable environment acts as
P1
P
S2
D
QQ1
U
T
S1

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a hindrance to the delivery of more houses. Stringent land utilization regulations put in place by
the Australian government leads to a shortage of land for housing. Additionally, delay in
approving construction structures and imposing of development contributions by the state and
local government have contributed significantly to the deficit in dwelling units in Australia. The
aftermath of this situation has been a reduction in consumer welfare and market failure exhibited
by affordability crisis in Australian housing industry. Since the government has sufficient control
over the supply-side factors, it has a unique role to play in ensuring that the escalating prices are
brought under control. For example, the leadership should focus on improving roads, water,
drainage, and sewerage to support the efforts of home suppliers in providing sufficient homes to
Australians. Severe land use policies should be relaxed to create adequate space to accommodate
more dwelling units. Reduction of red tapes will be essential in timely supply of homes to the
Australians. Ultimately, the government should reduce the development contributions to help the
property developers to put the costs involved in construction under control.

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Bibliography
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