Why is the land cost increasing in cities and what are the major drivers for the increasing house cost in these cities?

This article discusses the reasons behind the increasing land cost in cities and the major drivers for rising house prices. It explores the impact of population growth and scarcity of land on housing prices. The article also analyzes the role of interest rates and government policies in influencing housing demand and affordability.

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ECONOMICS.
Business Economics.
QUESTION 2.
a. Why is the land cost increasing in cities and what are the major drivers for the increasing
house cost in these cities?
A general justification would be that Sydney house supply is below its demand
level as the population grows and absence of land all together contribute to skyrocketing
of house prices. Studies reveals that Sydney has neither a scarcity nor an excess of
housing facilities. The most cities which had surplus housing include innermost
metropolitan city of Darwin, Melbourne and Sydney, numerous excavating mineral
company’s regions including the city of Canberra. In Sydney most the areas which had
surplus housing include Inner Sydney with an excess of nearly 5000 houses accounting
for 5% of the total houses in the town. The contributors of surplus is the fresh part of
growths (Rajapaksa, et al.). A considerable figure of these houses are unoccupied. These
might be for trade, unoccupied leasing or abandoned deliberately unoccupied by
shareholders. Most of the houses are ultimately unavailable. The studies did not discover
a durable association among the dwelling scarcity or excess and the migration in dwelling
cost at local level. The existence of sufficient number of areas across the Australia with
an excess of housing units which have since appreciated the robust dwelling cost
progression and a sufficient number has not contributed to increasing the dwelling cost. It
may shock to discover the present dwelling cost price abnormal rise in Sydney is not
extraordinary. For the last 5 years’ house prices has grown by over 80%. Preceding
studies in Australia, like for instance, the Council dealing with National housing supply,
focused on the countries estimations of the dwelling scarcity nonetheless this study
acknowledges the housing markets trend and that dwelling cost schedules and
affordability are expected to be as caused by resident demand and supply situations as by
extensive national circumstances. The analysis entirely covers the concept of basic
demand and it acknowledges that this may not be demonstrative of the demand for
dwelling in an old money matters sense. The study also does not consider Australia's
destitute population which do not own homes (Findlay & Garnaut, 2017). The shortage of
housing may have major consequences for housing policy in Australia. Strategist also
require to put much importance on further possible contributors of dwelling cost

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progression and dwelling reasonably priced, such as a variety of demand impacts
including interest rates and dwelling levy.
House cost increases at a speed rate than revenues due to forces of supply and demand
(Rajapaksa, et al.). In many advanced countries, basic economic transformation has
caused a rise cities growth. In extremely developed countries, including Australia, has
resulted to city and town land to become limited (Lim & Tsiaplias, 2018). As residents
increase in numbers, this shortage continue to rise. Our deliberate move to agree smaller,
deeper systems of growth has had a similar effect (Paris, 2017). The undeserved rise in
land cost that accumulate to current property-owners due to of urban growth have
changed city and town houses into a speculative asset (Findlay & Garnaut, 2017). An
increasing standard of living has made it likely for most of us to put a rising share on
their increasing revenues into housing (Del Giudice, De Paola, Manganelli, & Forte,
2017). A tax structure that let them to maintain some or all of the undeserved rise in
property and land prices and a monetary system that boosts them to borrow against this
enlarged price (Disney & Gathergood, 2018).
An understanding in the current real estate market condition of Australia shows
unceasing rise in land cost where Sydney, Darwin and Melbourne encountered the major
rise with the cost of housing components rising by over 16 per cent in the year 2015
(Balchin & Rhoden, 2019). The information that the Reserve Bank of Australia has kept
its cash rate at a record low of 2 per cent after reducing it by 25 base points each in 2015
is reflected to be the main possible factors associated with the progressive rising cost of
real estate (Rees, Smith, & Hall, 2016).

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Rent price in selected cities of Australia.
Table 1: Rent prices in selected cities of Australia.
From the table above, Considering the few selected cities in Australia Sydney, Melbourne
and Darwin we find that the median rent prices across the city Sydney is leading with
$582 followed by Darwin city which had $474 and lastly the Melbourne city follow
closely with $442. The changes in rent across the cities Melbourne city is leading as the
city where changes in rent is rampant at 3.5% annually followed by Sydney which
recorded 1.7% annually and lastly the Darwin city has -1.6% in changes in rent which
means the city does not exhibit rampant changes in rent (Mankiw, Taylor, & Andrew,
2016). The three cities have different level of yields where Darwin city leads with 5.83%
followed by Sydney which has a 3.20% yields and lastly the Melbourne city had 2.93%.
The drivers of the rising house prices in the city include, interest rates which
suggest that lower mortgage repayments allow mortgagors to use extra at any an agreed
reimbursement to revenue ratio (Gurran & Phibbs, 2015). This results to a rise in
dwelling demand and dwelling costs other factors remaining constant. Alternatively, once
interest rates increases, the house demand reduces and the cost of house continue to be

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stable. The lower interest rates over the years give rise to dwelling cost increasing in
Australia (Aalbers, 2016). Secondly, in Australian regimes all levels impose levies, taxes
and charges on the growth and usage of town land. To some degree these prices are later
distributed to the ultimate housing prices (Collier, Glaeser, Venables, Manwaring, &
Blake, 2017). These costs are developed tax, stamp duty on the sale and transfer of land
and land tax on new houses constructed and the renovated of prevailing houses. All of
these prices constitute to a remarkable elements of house costs.
Furthermore, interest rates when are lower, loans have turn into easier to acquire.
In the elongated period this has been a comfortable outcome of monetary deregulation.
Non-bank moneylenders have improved the accessibility of credit for housing. Ever since
deregulation, the Australian housing market has advanced to wide choice of goods and
credit is accessible to all possible debtors who can afford the repayments.

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b. Explain using appropriate diagram the above question a.
Figure 1: Construction Costs against housing.
The above given diagram explain the increase in the property and land cost in the cities
and towns of Australia. In the diagram above it can be seen that as the Reserve bank of
Australia has reduced the money rate in the bank, there is a rapid rise in the construction
expenses from CC0 to CC1 and the land business development will turn out to be less
cost-effective which will in turn make them to be more choosy in the selection of the land
for the development (Ball, 2017). From the diagram when the cost of construction
increases from CCo to CC1 the housing units or the supply or quantity of land available
for construction on the contrary reduces from QSo to QS1 (Mankiw, Taylor, & Andrew,

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2016). This situation can only be rectified by reducing cost of construction which will
reduce cost of housing hence demand for land will go down (Xiong & Tan, 2018).
The rental price is the price which an individual pay in order to use the scarce
resource for a limited time period he is charged a fee called rent the fee may be charged
monthly or yearly. On the other hand, the purchase price of land is the amount an
individual pay in order to acquire the parcel of land and indeed acquires the ownership
right. In our case we can apply the theory of factor demand from the graphs above the
rental price of land and the rental price of capital which entirely depend s on the forces of
demand and supply (Ashwin & Mankiw, 2016). As more and more quantities are
employed, a point will eventually be reached where the value of factor marginal product
is equivalent to the factors price. Due to diminishing in marginal product, products which
have excess supply yield lower marginal product and for that reason they fetch lower
prices in market and for the factors which have are limited in supply have a higher
marginal products and they conversely, they have higher prices as compared to their
counterpart’s factors in surplus supply (Ashwin & Mankiw, 2016).
c. Before tackling the above question it is important to recognise that one of the essential
features of the demand curve is its understanding of quantity demanded to price changes
and the understanding can be recognised as price elasticity of demand. On the other hand,
it is also important to clarify that if price elasticity is less than one the demand is regarded
to be inelastic (Henderson, 2019). Alternatively, the land supply for development of real

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estate property can be described as the quantity of land supplied for the construction of
housing units at different prices where an upwards slopping curve shows the essential law
of supply clarifying greater quantity is supplied at a greater price (Foley, 2019). Alluding
to the circumstances of Australia, mainly of Sydney it is seen that as implementation of
government procedures has limited the accessibility of new land for housing growths the
supply of land can be regarded as perfectly inelastic (Zhou, Zhang, & Zhu, 2019). It is the
regime of Australia which determines the supply of land for new housing growth openly
upsetting the market price of land properties of the country. In addition of this it can be
further strengthen that to support higher density growths the regime procedures in
Australia limit favours new housing growth within the city and town buildings without
restraining the supply of land for property growth on the outskirts of the city (Verdery,
2018).

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Figure 2: Rent against Housing/ Developed land.
The above diagram indicates a unit elastic demand, the rate of rent against the housing units and
developed land. As more developers continue with construction less and less of land supply
becomes available hence the demand for land goes higher. This situation result in certain
developers exiting the market (Crabtree, 2018). Thus the quantity of the supply of the land will
decrease, this will elicit a drop in the supply of the developed land from DL0 to DL1. The
reduction in the supply of the land available for development, this will elicit a surge in the costs
of the available land and the rent costs will rise from R0 to R1.
The unit elastic demand is a type of elasticity where the variations equivalently to a
transformation price elastic. A unit elastic type of demand trails a transformation in price when
buyers consume nearly substitute goods to meet their wants. In the same way, a unit elastic
supply trails a transformation in price when distributors have nearly substitute goods to produce.
Due to variation in the cost of goods causes same percentage variation in the capacity required or
quantity provided, the elasticity of demand is equivalent to negative one and the unit elasticity of
supply is equivalent to positive one (Mankiw, Taylor, & Andrew, 2016).

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