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Trends in Housing Price Growth- Article

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Added on  2019-09-18

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ECONOMICS FORMANAGERSArticle: Long-run Trends in Housing PriceGrowthStudent[Pick the date]
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Question 1: Summary of the article “Long-run Trends in Housing Price Growth”This article (Kohler, 2015) examines all the factors that drive the long-run trends in the housingprice growth of Australian market over the past three decades. Growth was observed in the 1980sin the housing prices and this growth was in line with the general price inflation in the Australianeconomy. Then, in the next decade of 1990-2000, the housing price growth was relatively strong.This was due to the significant rise in the debt-to-income ratio of the households in Australia.Finally, since the mid of 2000, the housing price growth has been explained by the strong growthin the population of the country. The article (Kohler, 2015) says that one of the most important assets that the Australians hold isthe housing. When the prices of the houses change, there are many economic variables that areaffected in the economy. This is because; any change in the price of the houses affects thebalance sheets of the households as well as the balance sheets of the banks. The writer of thearticle has found that in the past 30 years, there has been increase in the housing prices ofAustralia by almost 7 percent. Since the 1980s to the 2000s, the prices have increased and thereare different reasons for this growth. For instance, in the 1980’s, the prices rose due to highinflation, in the 1990s, the prices rose due to the significant rise in the debt-to-income ratio of thehouseholds in Australia and in the 2000’s, the increase in the prices can be attributed to thegrowth in the rate of population of the country. Therefore, it is clear that there are some factorsor drivers that have an impact on the long-run housing price growth. One of the drivers that this article (Kohler, 2015) talks about is the demand and the supply ofhouses that determines their prices. The prices of the housing depend on the interaction ofdemand and supply. When the demand of the houses is more than the supply, then the prices1
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increase. This happened in the 2000s when the population of the country increased. With the risein population, the demand grew more than the supply and hence the prices rose. Another driver isthe rate of inflation. This is simple and straightforward because inflation is the rise in generalprice level and with the rise in the price level, the prices of the houses rise too. Opposite to theinflation, there is disinflation, which is also one of the factors affecting the prices of houses.These are the long run factors that affect the housing prices. The article also talks about theshort-run drivers that affect the housing prices for the shorter periods. These are the cyclicalfactors. These factors include the monetary policy, the mortgage interest etc. Thus, the article has analyzed the factors that influence the growth of housing prices in Australia.The writer has mentioned that with the general inflation, the prices of the houses got inflated in1980s and the prices were relatively high and volatile. Then, in the next decade, the people goteasy access to the finance which led to rise in the debt to income ratio of the households.Finally, in the 2000s, the population grew, the immigration was high and thus the demand for thenew dwellings exceeded the supply. In the end, the article predicts that the situation in which increase in the household debtsupported the rise in the housing price growth is very unlikely to happen. But, the factor of thesupply of house can become a reason for the inflated prices if the supply starts to respond to thechanges in the demand of houses. 2
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Question 2: Assessing the housing prices of Melbourne as being overheated or notThe economy is said to get overheated when it has such a high productive capacity, that it cannotkeep a pace with the growing aggregate demand (Keynes, 2015). The overheated economy getsidentified when the rate of economic growth of the country is above the general trend and thegrowth is happening at the unsustainable rate. Also, in the overheated economy, the rise ofinflation rate is observed as a result of the prolonged growth rate of the economy. At this time,the production happens in the excess capacity and thus they create the excess productioncapacity. The main thing due to which this overheating occurs is the insufficient allocation of thesupply because when the people spend excessively and the consumer’s wealth increases, then thedemand increases more than the supply (Vohra, 2016). The article shows the signs that the housing prices of Melbourne are overheated. This is becausein the 1980’s the inflation of the economy was high that increased the demand and thus increasedthe prices of the houses. Also, the supply was not able to adjust to the demand shocks when thedemand for the houses rose due to growth in the population as well as due to the growth of thewealth of the consumers. The main cause of the overheated prices is the increase in the levels ofaggregate demand. In Melbourne, the demand was high which overheated the prices. Also, in theshort run, the aggregate demand exceeded the long run aggregate supply which is again a causefor the overheated prices. When the demand for the houses rises more than the supply, there isneed for over employing the resources like the workers are required to be employed for extrashifts (Girouard, 2006). But, this is unsustainable because the over employment of the resourcescannot be supported till an indefinite period. The housing prices in Melbourne are rising and theycause a threat to the economic and financial stability of the country (Ge, 2015). 3
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