Analyzing the Housing Market of Australia with Demand and Supply Concepts

The report analyzes the housing market of Australia with the help of demand and supply concepts. It discusses the reasons behind the increase in property prices, the impact of population growth and income on demand, and the government's efforts to control the market.

Running head: MANAGERIAL ECONOMICS
Managerial economics
Name of the student
Name of the university
Author Note

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Executive Summary:
The report has intended to analyze the housing market of Australia with the help of some
economic concept. Hence, before this, the report has selected some newspaper articles to
discuss the entire scenario. After that theoretical discussion on demand and supply has been
done. Those concepts are used further to discuss the real scenario of this housing market. at
the end, some recommendation has provided to control this situation.

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Table of Contents
Introduction:...............................................................................................................................2
Outline of theory:.......................................................................................................................2
Application of theory to article:.................................................................................................7
Conclusion:..............................................................................................................................11
References:...............................................................................................................................12

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Introduction:
The property prices in Australia have increased significantly since 2001, which in turn
has generated huge debate among economists and policymakers. The house prices of this
country have increased at a faster rate compare to incomes and rents. Some chief reasons
behind this increase in property prices are credit availability due to financial deregulation,
low rate of interest since 2008, limited supply of land and high population growth and so on.
According to the Guardian, an Australian newspaper, homeownership of this country is
chiefly depended on consumer income, which in turn has increased the gap between rich and
poor people (www.theguardian.com 2018). People with lower income have spent
comparatively more prices or rents compare to one with higher income. In this country, most
of the cities, like Sydney and Melbourne, have experienced higher amount of median house
price compare to the median household income, which in turn has decreased the affordability
of houses for Australian citizens. However, the housing prices is going to decreased in 2018
as the index of national median house price has decreased by 0.3% in December 2017
(Jericho 2018). According to the Sydney Morning Herald supply of home buildings has not
affected the housing price to decrease further. The chief reason behind this price slowdown is
tough banking regulations for receiving home loans. In this context, it can be mentioned that
the government of Australia has supplied enough houses to meet the demand for this product
in market. However, this excess supply of house does not follow the supply law and
consequently the market price has remained at a higher level.
Outline of theory:
The Australian market of houses can be analyzed significantly with the help of
demand and supply concepts of microeconomics, where elasticity of both these two factors

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can be considered as one of the important tools to measure the degree of changing demand or
supply while price has changed by small proportion.
According to the demand law, price of a commodity and its quantity demanded has a
negative relationship, that is, an increase in price of a particular product can decrease its
quantity demanded while the opposite situation can also be occurred. Hence, the demand
curve for a normal goods and a luxury one has always faced downward with negative slope to
represent this inverse relation and can be described more precisely with the help of a demand
curve (Dubé 2018). In this context, it needs to mention that under this law, other factors,
which can influence the demand for a product except its own price, are considered as stable.
Those factors are consumer’s income, tastes and preferences of the concerned person, price
of relative commodities and so on. Hence, the demand for a commodity can also be changed
at the given price level, if income of the consumer has changed, where a positive relationship
can be seen under this situation, where the demand curve has shifted to upward or downward.
This shift can be described accurately with the help of a suitable diagram, which is drawn
below.
Figure 1: demand curve for normal goods
Source: (created by author)

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The above figure has depicted an inverse relationship of price for a particular product
with its quantity demanded. In the above diagram, At P0 price level, the initial demand curve
is D0 and its corresponding amount o f output is Q0. This curve has shifted to the right, that
is, from D0 to D2, when income of the consumer has increased. Thus, at same price level the
amount of quantity demanded has increased from Q0 to Q2, which has implied that at initial
price, the consumer can afford more products to consume and consequently, the demand has
increased.
On the other side, according to the supply law, for a particular product, its price has
represented a positive relationship with its quantity supplied, that is, supply of a product can
be increased if its price has increased while the other situation can also be occurred (Cha
2016). Hence, the supply curve has possessed a positive slope that can be represented by an
upward rising curve. This can be described accurately by analyzing a supply curve.
Figure 2: Supply curve for normal goods
Source: (created by author)

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The figure 2 has represented an upward sloping supply curve to represent a positive
slope. According to this diagram, price of a product has increased by P0 P1 unit, which in
turn has increased the quantity supplied by Q0 Q1 unit.
In this context, it is essential to analyze the concept elasticity to measure the change in
quantity demanded when income of consumers has changed by 1 percent. For normal
products, the demand curve has become elastic, which means, a small change in income can
influence the demand of that product significantly (Ragni and Baldin 2015). This can also be
represented with the help of a diagram.
Figure 3: Elastic demand curve for normal goods
Source: (created by author)
The above figure has represented an elastic demand curve that has represented a
positive relationship between consumer’s income and its quantity demanded, where at P0
price the initial output demanded has remained at Q0. As consumer income has increased,
they have started to demand for normal and luxury goods, for instance, as income has
increased by P0 P1 unit, the quantity demanded has also increased by Q0 Q1 unite. However,

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for giffen goods, this relation has become opposite (Davies 2015). People want to substitute
giffen goods with normal one when their income increases.
On the other side, the supply elasticity of a product has depended on its producers or
sellers. Under this situation, a small change in price can influence the producers to supply
more and the supply curve faced elastic by its nature (Diamond 2017). Moreover, for under
the concept of inelastic supply curve, the producers cannot change its supply in the same
direct in which its price change. This situation can be arrived due to limited resources.
Moreover, from these concepts of demand and supply an equilibrium price of product
along with its equilibrium quantity of output can be obtained, where shifting of demand or
supply curve can influence both price and output level to change accordingly.
Figure 4: Equilibrium price and quantity of a product
Source: (created by author)
According to the figure 4, Pe is the equilibrium price while Qe represents equilibrium
amount of output. As income of consumers has increased, the demand curve has shifted from

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D0 to D1. Hence, at given supply level, this increase in demand for a product has increase its
prices from Pe to P1 and the level of output demanded has also increased from Qe to Q1.
Application of theory to article:
The concept of demand and supply is applicable in the field of housing market of
Australia. The country has huge demand for houses as the number of population is increasing
rapidly, where migration is one of the chief reasons (Bayer, McMillan, Murphy, and Timmins
2016). Moreover, the government of this country has also supplied various facilities like low
rate of interest to lend money and that has helped to increase the demand for this product at a
faster rate.
Figure 5: Annual residence of population growth
Source: (theguardian.com 2018)
The above figure has represented the annual growth rate of population in Australia,
where the yellow shaded area has measured the net overseas migration while the blue shaded
area has indicated natural growth of population. It can be stated from the above diagram that
the total number population in Australia has increased rapidly as the net overseas migration

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has increased significantly since 2008 (theguardian 2018). Hence, this increasing population
has helped the demand of houses to increase further.
Figure 6: Increase in consume income in Australia
Source: (Tradingeconomics.Com 2018)
The above diagram has supported the concept that individual income has increased
significantly in Australia, which in turn has increased the demand for houses. Hence, with
more incomes, the citizen of Australia can now demand for houses more.
Hence, due to this population growth along with other economical factors like
increase in income or reduction of interest rate has led the demand curve of households to
shift rightward as shown in figure 1 (Jawad, Glant, and Millett 2017). This excess demand of
houses has helped the price of this product to increase.
On the other side, excess supply of a product in market has influenced the price of it
to decrease. This is true for all normal goods. However, this excess supply cannot influence
the housing price to decrease in future. According to some statistical data, the government of
this country has supplied sufficient amount o houses between 2001 and 2017 that can cover
entire demand of that product (Andersen et al. 2018). However, for this market, the excess

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supply of any a product cannot reduce its price level. Hence, this economic theory is not
completely applicable under this circumstance. Moreover, this situation can be described with
the help of some economical concept.
The supply law has based chiefly on normal goods. Moreover, both demand and
supply concepts are based on the assumption that each product has close substitutes. Thus, for
those normal products, an individual wants to pay equal amount of money as the concerned
person has received same level of utility (Yao 2014). However, according to some
economists, housing does not fall under this category as different house has different features.
Consequently, increasing supply of one types of house cannot reduce the demand for other
types of this product and this practical factor has contradicted with law of supply
In addition to this, the concept of elasticity can also be incorporated here. Being a
normal good, the quantity demanded for houses can be increased comparatively more while
the income of a consumer has also increased. This is true for housing market, as people have
demanded more houses due to their income increment (Higgs and Worthington 2014).
However, presently this demand has decreased because of banking regulations, as it has
restricted to lend the money to their customers for purchasing houses, which in turn has
decreased the demand for those products.

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Figure 7: Housing price index of Australia
Source: (Tradingeconomics.Com 2018)
The above diagram has supported the argument that has stated above. The housing
price index has fluctuated drastically since 2014. It has remained at a higher level in 2017
while at the end of this year the value of this index has decreased significantly
(Tradingeconomics.Com 2018). This housing price index of Australia is measured as the
weighted average of price variation for residential properties, based on eight major cities of
this country, which are Sydney, Brisbane, Melbourne and Perth and so one (Landvoigt,
Piazzesi and Schneider 2015).
. Here, the concept of supply elasticity has not influenced its market price. The
government has intended to supply more houses while its price has increased significantly to
reduce it and to increase the house affordability among citizens (Ferrero 2015). However, due
to some external factors, the government cannot fulfill their plan though housing price has
decreased due to decrease income of consumers, which in turn has decreased the price of
houses by small amount.

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Conclusion:
Hence, in conclusion it can be stated the entire housing market can be represented
under the concept of demand and supply while excess demand among people has influenced
the price of houses to increases. Initially it has been believed that the chief reason behind this
increasing price its shortage of housing supply. However, the country has sufficient
availability of houses, which in turn offset the entire market demand. However, by increasing
the number houses, the government cannot control the situation; rather it can take some
policies to control the market and to protect the self-interests of common people (Kuttner and
Shim 2016). The government can revise its monetary and fiscal policies to control the market
price of that product, for instance, by increasing the rate of interest for housing loans and
increasing the tax structure. Moreover, they can provide houses to middle or lower income
group people with cheaper rate as excess prices have become a burden for them especially.
Hence, to regulate this situation, proper government regulation is essential where concept of
demand and supply be implemented accurately.

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"Australia Disposable Personal Income | 1959-2018 | Data | Chart | Calendar".
2018. Tradingeconomics.Com. https://tradingeconomics.com/australia/disposable-personal-
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"Australia House Price Index | 2002-2018 | Data | Chart | Calendar".
2018. Tradingeconomics.Com. https://tradingeconomics.com/australia/housing-index.
"Australia's Housing Market On Track To Cool In 2018 As Prices Fall In Capital Cities".
2018. The Guardian. https://www.theguardian.com/australia-news/2018/jan/02/australias-
housing-market-on-track-to-cool-in-2018-as-prices-fall-in-capital-cities.
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