Impact of Stamp Duty on Housing Market

This assignment analyzes the effects of a 4% increase in stamp duty on Australia's housing market. It examines how the change in tax rate affects consumer and producer surplus, total welfare, government revenue, and market equilibrium for both foreign and domestic buyers.

Running Head: ECONOMICS
Economics
Name of the student
Name of the University
Author note

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Table of Contents
Answer 1..........................................................................................................................................2
Answer 2..........................................................................................................................................6
Answer a......................................................................................................................................6
Answer b......................................................................................................................................8
Answer c......................................................................................................................................9
References......................................................................................................................................10

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Answer 1
The focus of the IMF article is to portrait the picture of price rise in Australia. The
scenario of rapidly growing housing price considered as massive overvaluation in the property
market. The argument of overvalued housing price is countered by stating technical flaws in
house price computation. Price of houses is Australia during this time has accounted an
astonishing growth rate lagging behind many of the nation holding same position as Australia.
Several factors contributed to price inflation in the housing market. Rise in income and easy
accessibility to loans are two primary factors. Housing prices are grown at an extraordinary rate
in some specific capital cities of Australia.
In the event of housing price evaluation, two major members are Melbourne and Sydney.
These are the two vital capital cities of Australia in terms of every economic aspects. Both the
regions have passed through a rapid price growth in the housing market. Prices of house are
overvalued by more than 20% during this time (Baur and Heaney 2016). The average price of
houses helps to get an overall idea of housing prices. A more accurate measure of central
housing price is median. The following figure represents the median price trend in different cities
of Australia with special attention given on Sydney and Melbourne.

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Figure 1: Trend in Median house price
(Source: imf.org 2015)
When compared with median housing price Sydney is in first place recording a though
fluctuating but upward rising trend in housing price. After Sydney, Melbourne recorded an
unexpected growth rate in housing price. Other capital cities though accounted a rise in
residential price but still are outpaced by the two central cities. The figure shows clearly that
growth of housing price in Melbourne is more than most other cities in Australia. The more than
expected growth of housing price is often viewed as overvaluation of residential property
(Windsor et al. 2015).

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Figure 2: Price of residential property in Melbourne and other cities
(Source: imf.org 2015)
Like in median housing prices, in terms of growth in residential prices Melbourne
outperformed cities like Adelaide, Brisbane, Canberra, Hobart, Perth and Darwin. Growth in
residential property price in Melbourne is nearly 10%. In another extreme, there are cities like
Perth and Darwin when residential prices even accounted a negative growth rate.
Several force work behind the price in Melbourne’s houses. The primary factor is the
discrepancy between demand and supply forces. Demand for accommodation is rising more than
the supply side ability to meet the demand. The growing population of Melbourne constitutes a
continuous pressure on demand side. The population growth is not a temporary phenomenon. It
is not only citizens of Melbourne creating massive demand of housing but also the immigrants
coming from different countries (Rogers, Lee and Yan 2015). In the forthcoming years,
population is Melbourne is expected to grow at a rate more than that accounted in past 13 years.
The domestic and foreign population creates immense pressure on housing demand.

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One factor attracting more people in Melbourne is the spread of urbanization.
Urbanization comes with several facilities necessary to enjoy an improved living standard. In
Australia, more than 66 percent of population lives in urbanized capital cities. The favorable
natural, social and environmental condition work as driving factors behind urbanization. The city
has a soothing temperature that attracts many people. The natural and environmental factors are
favorable for developing agriculture providing one primary source of income. In an urbanized
city, there are various job opportunities offering different income sources and a better means of
life (Elmqvist 2014). Each year a number of people migrate to Melbourne making it the second
most population dense region of the nation.
In Melbourne, growth in housing demand from foreign buyers is considered as one of the
significant determinants of housing price growth. Foreigners mostly prefer to have their
accommodation to the inner city (imf.org 2015). In addition to growing housing demand due to
increased population, demand also accelerated from easy availability of loan at a cheap rate.
The response of housing supply to the growing demand fail to achieve balance in the
housing market. The supply of housing is relatively inelastic in nature. All these cater to an
overvalued price of housing price in Melbourne.

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Figure 3: Housing market in Melbourne
(Source: As created by Author)
Answer 2
Answer a
As discussed above, growing housing demand coming from foreign buyers is one
primary reason for housing price overvaluation in Melbourne. With an attempt to reduce demand
side pressure of housing of foreigners’, city government takes the decision to increase stamp
duty surcharges (claytonutz.com 2016). The policy is expected to fulfill domestic housing
demand by increasing availability of houses to them. The policy consequences are described in
the following figure.

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Figure 4: Effect of an increased stamp duty charges
(Source: as created by Author)
The housing demand curve for foreign buyers is shown dd and corresponding supply
curve is ss. With earlier stamp duty surcharges, price in market is P1 and number of houses sold
is Q1. At this stage, surplus to consumers is given by the triangle eP1G and the surplus to
producer is eP1H. Total surplus obtained as summing up consumer and producer surplus is the
entire area of the triangle eGH (Friedman 2017). Now consider an in increase in stamp duty from
3% to 7% that is an increase of 4% denoted by t. With increase in stamp duty, the demand curve
shifts inward from its earlier position. The stamp duty inclusive price paid by the foreign buyers
is Pb. The high price reduces consumer surplus to the area fPbG. Sellers receives a price as low
as PS and reduced producer surplus of iPSH. Increase in stamp duty rate creates social distortion
shown by the triangular area efi.

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Figure 5: Market for domestic buyers
(Source: as created by Author)
In the domestic market available supply increases. This is indicated by an outward shift
of the supply curve. At the new equilibrium e1, surplus to both consumers and producers
increases.
Answer b
The impact on social welfare is ambiguous. In the market for foreign buyers total surplus
reduces as the new stamp duty causes a declines in both consumer and producer surplus.
Moreover, there is a deadweight loss arising from increased tax rates. In the market of domestic
buyers, in contrast total surplus increases. If the positive impact in the market for domestic
buyers outweigh the effect on foreign buyers then a gain in social welfare will be realized
(Kolmar 2017).

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Answer c
The city government has the opportunity to earn a greater revenue. The increases in tax
revenue is equal to the area of the rectangle PbPSif in figure 4. This is obtained by increase in tax
rate (t) times the quantity sold (QT) in the market.

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References
Baur, D.G. and Heaney, R.A., 2016. Bubbles and Crashes in the Australian Residential Property
Market.
Claytonutz.com. (2016). New duty and land tax surcharges for foreign buyers of land in
Australia - Knowledge - Clayton Utz . [online] Available at:
https://www.claytonutz.com/knowledge/2016/june/new-duty-and-land-tax-surcharges-for-
foreign-buyers-of-land-in-australia [Accessed 5 Jan. 2018].
Elmqvist, T.A., 2014. Urbanization, biodiversity and ecosystem services. Springer,.
Friedman, L.S., 2017. The microeconomics of public policy analysis. Princeton University Press.
Imf.org. (2018). [online] Available at:
https://www.imf.org/external/pubs/ft/scr/2015/cr15275.pdf [Accessed 5 Jan. 2018].
Kolmar, M., 2017. Introduction. In Principles of Microeconomics (pp. 45-53). Springer, Cham.
Rogers, D., Lee, C.L. and Yan, D., 2015. The politics of foreign investment in Australian
housing: Chinese investors, translocal sales agents and local resistance. Housing Studies, 30(5),
pp.730-748.
Windsor, C., La Cava, G. and Hansen, J., 2015. Home price beliefs: Evidence from
Australia. Journal of Housing Economics, 29, pp.41-58.