Analysis of Factors Contributing to High Housing Prices in Sydney and Melbourne

This essay analyzes the factors contributing to high housing prices in Sydney and Melbourne, including demand and supply factors, income elasticity, and government policies. Suggestions are provided to reduce the prices, and the socio-economic importance of these cities is discussed.

Running head: BUSINESS ECONOMICS
Business Economics
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In Australia, property prices have become a serious issue for various economists
along with policymakers. The country has possessed five biggest cities, which have
unaffordable housing markets. This situation has occurred due to huge demand for houses
while supply has remained insufficient. In some capital cities of this country, like Sydney and
Melbourne, housing prices have increased significantly for the last few years (Hutchens
2018). Hence, to measure the degree of expensiveness of houses, various valuation metrics
like price-income ratios and price-to-market rents ratios are used (Miao 2014). This essay has
intended to analyze those factors based on some newspaper articles. Moreover, some
suggestions are provided to reduce the house prices in these two cities. This essay has also
tried to find some causes for which Sydney and Melbourne have high demand for dwelling
irrespective of their high price rate. For supporting those arguments, proper evidences are
also provided.
According to the Sydney Morning Herald, the second worst position, based on
housing market, has possessed by Sydney while Melbourne has possessed the fifth one. The
house prices in Sydney have remained almost 13 times higher compare to the median
household income. For Melbourne, these prices have remained almost 10 times higher
compare to the country’s median income (ABC News. 2018). Hence, to understand these
differences more precisely, price-to-income (PTI) ratios can be analyzed for those capital
cities of Australia. According to this ratio, the median price related to a property is compared
with each city’s median household income. It has been observed that the PTI for Sydney and
Melbourne has increased significantly compare to other capital cities of Australia. This ratio
for Sydney has stood at 9.5 times more than the median income. For Melbourne, this ratio has
remained at 8.7 times more compare to the median household incomes. Moreover, this ratio
has remained above 39% for Sydney and for Melbourne it has remained above 30% for the
last five years (Scutt 2018). On the other side, the PTI ratio for Perth and Darwin has given a

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negative value, which implies recession period these cities. In addition to this, the price-to-
market ratios (PTR) can be taken as another index of valuation. This ratio is measured by the
price of a home with its annual cost for renting. This ratio is also high for Sydney and
Melbourne.
Hence, the increasing price of houses can be determined with the help of demand and
supply concept. According to the demand law, price of a commodity has a negative relation
with its quantity demanded. However, excess demand has led the price of a commodity to
increase further. This phenomenon is also applicable for the housing market in Australia. The
country has some demand side factors, which have influenced the demand for houses to
increase more. The chief factor behind this increasing price of houses is steady population
growth due to immigration (Hutchens 2018). In addition this, market stability and interest of
foreign buyers have allowed housing prices of these two cities to increase more along with
higher rental rates (Valadkhani and Smyth 2017). The government has also played a vital role
to influence the housing demand to increase significantly. For instance, it has charged lower
interest rate for lending money, which in turn has influenced the demand for houses to
increase further. In addition to this, per capital income of Australian people have also
increased constantly and this has influenced them to purchase new dwellings.
Figure 5: Annual residence of population growth
Source: (theguardian.com 2018)

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Figure 1 has represented the number of total population, which has increased
drastically in Australia. In this context, it can be mentioned that this increasing trend has
occurred due to immigration and this has been represented by the yellow shaded area
(theguardian.com 2018). Moreover, the blue shaded are has represented the number of
domestic population.
Figure 2: Increasing income of Australian citizens
Source: (Tradingeconomics.Com 2018)
Moreover, the concept of Income elasticity can also be considered to support this
view of increasing housing prices (Su and Qian 2018). As income of Australian citizens has
increased sharply for the last few years, those people have intended to buy new houses for
them. This is shown in figure 2. It can be seen from this above figure that income of
Australian people has increased drastically since 2013 (Tradingeconomics.Com 2018). Being
a luxury good, a small increase in income of customers has influenced the demand for houses
to increase by large amount.
In addition to this, supply side factors are also needed to consider. Excess supply of a
product has forced the price of it to decrease by some amount. However, for housing market
in Australia, excess supply cannot influence the price to decrease noticeably (Wade 2018). In

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these two cities, the government has increased the number of available houses that can fulfill
the excess demand for this durable item. However, like other commodities, a house does not
possess any substitute product. For instance, demand for houses within the city is higher
compare to the houses of outskirts areas.
Hence, from the above discussion, it is seen that house prices have increased for
various reasons. However, by applying some affective monetary and fiscal policies, the
government can reduce this higher amount of prices. Firstly, the Australian government can
increase the rate of interest through its monetary policy. This increasing rate of interest can
lead people to lend less amount of money from banks. This in turn can reduce the demand for
houses due to lack of capital availability among people (DeFusco and Paciorek 2017).
Secondly, strict rules for purchasing properties can also negatively influence the demand for
houses. However, under this situation, demand for house rents can be increased (Charles
2017). Thirdly, by decreasing foreign interest in housing market, the country can also
influence the demand for houses significantly. Being capital cities, both Sydney and
Melbourne has possessed economical importance for which, most of the foreign customers
intend to buy a house within these two cities. The government, by implementing affective
policies, can control this increasing demand of foreign customers. For instance, the
government can impose extra charges on foreign customers for buying a house within these
cities (Feldstein 2017). Lastly, the government can increase the supply of houses by
constructing more apartment buildings. Moreover, for houses of outskirt area, the government
can provide excess facility like charging lower prices, low interest rates for lending money or
other financial supports. Those factors can influence customers positively to buy a new
house.
According to the SGS Economics and Planning (SGS) of Australia, Sydney and
Melbourne have contributed significant amount to the country’s national income. These two

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countries have jointly contributed 68.8% to the gross domestic product (GDP) of Australia,
during 2016-17 (Sgsep.com.au. 2018). With this highest amount of contribution, both Sydney
and Melbourne are developing their economic performance since 2015-16. Sydney has
possessed a strong economical condition as it has string financial sector along with trading
and manufacturing one. This in turn, has helped the city to become the largest economy of
Australia. Sydney has possessed strong banking network as 44 authorized commercial banks
can be found over here (Feldstein 2017). In addition to this, it has received significant amount
of tourists from all over the world. The chief attraction of this city is the Sydney Opera House
(McLennan, Becken and Moyle 2017). Manufacturing sector, by consisting with advanced
electronics, food processing and biotechnology, has become the largest hub in Australia.
Melbourne, the state capital of Australia, has also possessed economical importance.
The city has higher rates in education, health care, entertainment, research and development.
Moreover, tourism and sporting sectors have also earned huge economical importance. For
this reason, this state capital has become the most residential city in this world since 2010
(Melbourne.geografia.com.au. 2018). Melbourne has become one of the leading financial
centers of the Asia-Pacific region. According to the Global Financial Centres Index, this city
has ranked among the 15 most competitive financial center, all over the world. In addition to
this, the city is referred as cultural capital of Australia. Australian impressionism, footballs,
films and television industries have founded over here.
Thus, it can be stated that both cities have possessed noticeable position from
economical and cultural perspectives. This can influence a young professional to buy a house
in Sydney or Melbourne irrespective of higher prices. Those cities have offered huge
employment opportunities through various sectors like tourism, research and development
and trade (Backman and Nilsson 2018). Hence, it can be easier for a young professional to
obtain a proper job, based on educational qualification. Moreover, cultural sectors have

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provided huge opportunities for relaxation and outing, which have higher demand among
young generation (Richards 2018). Thus, those factors have positively influenced the demand
for houses within these two cities.
In conclusion, it can be stated that dwelling prices in both Sydney and Melbourne are
very high. Huge population growth along with increasing income of citizens and lower rate of
interest has led the demand for houses to increase noticeably. On the other side, due to
insufficient supply of houses, both cities have experienced excess demand, which in turn has
helped to increase these prices. However, through imposing some monetary and fiscal
policies, the government can control this increasing trend of prices. For instance, by
increasing the rate of interest and imposing extra charges on foreign buyers, the government
can reduce this excess demand for dwellings. In this context, it can be stated that Sydney and
Melbourne have possessed socio-economical importance for which young people intend to
buy a house within these two cities without considering higher prices.

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