Impact of Falling Demand on Australian Housing Market

ECONOMICS
STUDENT ID:
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Question 1
In the recent times, the performance of the Australian housing market has been lackluster. This is
reflective from the fall in house prices in various cities across capital. The extent of fall is clearly
alarming considering that this is the biggest fall in property prices witnessed since global
financial crisis. The key factor responsible for the slowing housing market in Australia is the
falling demand. The demand is tapering off owing to the tighter lending norms that have been
imposed by the banking regulator in the recent times (Chau, 2019). As a result, there has been a
drop in the mortgage related credit. This is responsible for the falling demand in housing which
is leading to falling property prices as indicated in the graph below.
From the above diagram, it is apparent that demand for houses has taken a plunge owing to
difficulty in obtaining loans. The supply of housing has remained constant. The net impact is that
there is a change in the equilibrium point. One of the key implications of this shift is the decrease
in the prices which is causing housing prices to soften (Mankiw, 2014). This may prove to be
further dampener to incremental new demand for housing and may lead to a vicious cycle. As a
result, it is imperative that some stimulus package is required on the part of the government so as
to enhance the demand of housing which would lead to prices firming up again. This has been
done in the past through favorable tax changes such as negative gearing but till now the
government has been reluctant (Krugman, 2015).

Question 2
a) In the given context, there are two aspects that need to be considered namely the sign of the
price elasticity of demand and also the magnitude. The price elasticity of demand for normal
goods is negative but the price elasticity of demand in the given case is positive. This implies
that the underlying good is an inferior good. Also, the magnitude of price elasticity of
demand is higher than 1 which highlights that the demand for the product is highly elastic.
As a result, the seller would be well served by keeping the prices low as higher prices can
have significant adverse impact on demand (Mankiw, Mankiw & Taylor, 2015).
b) The cross price elasticity for the given product would need to be analysed in the context of
both the sign and also the magnitude. The sign of the cross price elasticity is vital as it helps
in indicating whether the given pair of goods are substitutes or complements. In the given
case, the cross price elasticity is positive which implies that the given goods (i.e. Good A and
Good B) are substitutes. Also, the magnitude of cross price elasticity is 3 which clearly
indicates that the demand for one product is quite sensitive to price charged by the other
product. As a result, even small price fluctuations tend to produce significant changes in
demand (Arnold, 2015).
c) The income elasticity for the given product would have two aspects namely the sign and the
magnitude. For normal goods, the income elasticity is positive as the demand is expected to
increase as there is an increase in income of consumers. For inferior goods, the income
elasticity is expected to be negative. For the given good, income elasticity is positive which
implies that that the underlying good is normal. Also, the magnitude of income elasticity is 3
which implies that the demand of the underlying product is highly sensitive to the changes in
income. This is because for change in income by 1 percent, the corresponding change in
demand of the good would be 3 percent in the same direction (Nicholson & Snyder, 2016).
d) The price elasticity of supply for the product is given as 3. With regards to this particular
elasticity, only the magnitude would be taken into consideration. The magnitude of 3 implies
that the supply of the product is highly sensitive to price. This is because when the price
tends to change by 1 percent, the corresponding change in supply of the good would be 3