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

Running head: BUSINESS ECONOMICS
Business Economics
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1BUSINESS ECONOMICS
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

2BUSINESS ECONOMICS
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)