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Australia's Housing Market Imbalances

   

Added on  2020-03-04

4 Pages1269 Words36 Views
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INTRODUCTIONThis report looks at the housing sector in Australia through the lens of the most recent report titled Housing supply responsiveness in Australia-distribution, drivers and institutional settings. This is based on a study by the Australian Housing and Urban Research Institute. (Ong, et al., 2017)It inquires into the links between housing policies, labour force participation and economic growth in Australia. More specifically it attempts to understand the supply side dynamics of housing so that policy making can be aided and housing can be delivered effectively for all. This report focuses on new housing only. It does not look at any additions or deletions to the total stock of housing due to demolitions and conversions. THEORY BEHIND THE PRESCRIPTIONSA simple demand and supply model can be assumed to fit the market for housing in Australia, exceptthat the market is not homogeneous .We have separate markets for different income levels in terms of elasticities and constraints. So we can havea low cost housing market that is separate from middleincome housing market. Still further we have an upper income housing market. The differentiator in thesemarkets is the income of the prospective buyer. In a fre market with no government constraints and rule on pricing the equilibrium is simply the point where demand equals aupply. This is shown by the point E, where Q* amount of houses that are exchanged in the market. The price that prevails is P*. This simple analysis can be disturbed by imposition of price floor or price ceiling or any limit that we set on the quantity of houses that be exchanged. The equilibrium can shift due to a change in demand and /or supply determinants.HOUSING SECTOR IN AUSTRALIAWe must note that housing is an importanty sector that drives growth in the economy. This sector is the key sector that is watched for signals of growth or recession in any economy. This explains why this report looks at the issues in housing sector, which maybe solved in order to unshackle the growth potential of Australian economy. More specifically this report looks at the supply side of the market for housing. It deals with the supply side of the markets and investigates:
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The degree of response of supply to demand pressures. The response of housing to various drivers like price, population, regional aspects.Economic literature tells us that supply must respond to a few determinants. One of these is productivity gains. As productivity rises, incomes rise which pushes up demand for housing. It is now up to supply to increase in responses to greater demand. If supply remains constant then prices will rise from P* to P1. An increase in supply can soften this increase to P2 only as shown in figure 2. (Anon., n.d.)Some other determinants include migration to better areas, higher income, policy measures like tax rebates and other policy measures that boost supply. THE REALITYProperty prices in Australia have risen sharply. As per some estimates property prices in Sydney rose by 20% in 1 year , while the average for the country stands 12.9%. (Hutchens, 2017). Further prices rose by 17.15% in Melbourne, 13.64% in Canberra, 11.05% in Hobart (11.05%), and only Perth and Darwin saw a decline. ( see chart below) There is a distinction between houses and units, such that unit prices grow slowly and show less rapid rise. For 5 major cities, house prices rose by 13.35% in 2016 over 2015, as compared to 9.83% rise for units/apartments. This price rise in driven by easier mortgages which are created by RBA’s interest rate cut to 1.5% and ‘a rebound in buy-to-let investoractivity during the second half of 2016.’(Smyth, 2017)
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