Real Estate Outlook Assignment Analysis

Running head: MICROECONOMICS
Microeconomics
Name of the Student
Name of the University
Student ID

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Table of Contents
Answer 1..........................................................................................................................................2
Answer 2..........................................................................................................................................4
Answer 3..........................................................................................................................................6
Answer 4..........................................................................................................................................8
Reference.......................................................................................................................................11

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Answer 1
“2018 Real Estate Outlook: The Australian Perspective,” Deloittee, February 2018 (pages
1-10)
Australia has continuously grew economically over the past 26 years and in 2017, the
country slowing factors of the economy seemed to clear gradually. Globally, all the economies
performed well, especially the Asian economies with whom Australia shares string economic
links. Thus, growth in the economies of Asia has impacted the country positively. The
employment in Australia increased significantly. It is expected that this growth in employment
will increase the income of the people residing in the country. Thus, there will be increased
demand that will boost the growth of business activities. However, the inflation rate of the
country is still at low. Consequently, there will be increase in investment in the real estate sector
and thus there will be increased supply in the real estate sector (Hulse and Burke 2016). The
Royal Commission however possibly increase the effective cost of lending to discourage
investment in risky projects. Due to increased employment and rise income there is rise in
demand for housing property and thus there 47% rise in prices of houses in the Australia. In
Sydney, the house prices rose by about 80% and in Melbourne it is 50%. The growth is not
limited to residential segment of the sector but also to commercial and industrial sector. Growth
in any sector is desirable but along with this growth is housing sector the ratio of housing debt t
income is on rise and is currently the second highest in the world. Therefore, to deal with the
problem of rising household debt, real estate sector of Australia should move the model of
“Build to rent”. The household debt will reduce due to rental properties and the risk associated
with the real estate sector will be distributed (Lowe 2017). Additionally, the newly developed
property can be flourish with the investment from the foreign nationals as they are allowed only

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to purchase new properties in Australia. Thus, selling new properties to foreigners would be
beneficial for the country as that would reduce the household debt of the country. It is observed
that the mortgage fund sector is declining as the domestic banks are reducing their exposure in
the real estate sector. Thus, it can be inferred that the real estate sector in Australia is an
attractive venture for foreign investors and the most of the foreign direct investment in the
country comes from the real estate sector.
“House Price Falls May Be Ending, But Do Not Expect Another Boom,” by Michael Janda,
ABC News, July 19, 2019.
In the article, the author focuses on the end of low price phase of housing market in
Australia, specifically in cities in the east coast of the country. The policy of easing in the
country has helped the price of the housing market. In both Sydney and Melbourne the prices has
increased. As per the article the rise in prices of houses in Australia has increased due to
reduction in cash rate by RBA, the victory of the Coalition in election and 7% removal of
mortgage service floor by the government (Gurran and Bramley 2017). All these factors are
going to favor the rise in price of the houses in the east coast of the country. However, rise in
prices of the houses would not touch the previous peak especially in the case for Melbourne and
Sydney. The major player in tightening the expenditure of household and excessive rise in price
of the houses is the restriction in credit. The increase in supply of the houses for rental purpose
might increase the possibility of rise in housing price if interest rate is reduced and credit
restrictions are loosened up. However, such a boom in the housing market is not at all desirable
as it would increase the debt burden of the country and leads to increase in number of loan
defaults (Bullock and Orsmond 2019). Therefore, the economy of the country would face
economic slowdown with increased rate of unemployment and low income. Low income causes

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consumer spending to fall thereby the output of the country decreases. In addition to that, global
issues such as US-China trade war and Brexit could raises the chances of currency war. Hence,
these will impact the prospective buyers and thus housing market may not prospect as expected.
Answer 2
Figure 1: Buyer’s Tax by the government
Source: (Created by the Author)
(a) At the free market equilibrium the price of housings in Australia is P* as shown in figure 1.
On the other hand, the equilibrium quantity is shown as Q8 in the figure. Now, the government
imposes a buyer’s tax and owing to that the price increased from P* to P2. Consequently, the
demand from housing properties decline from Q* to Q2. Thus, at this level of quantity the
producers are able to charge price equal to P1 as shown in the figure. The price received by
producers is P1 and paid by the consumers is P2. Therefore, the amount of buyer’s tax charged

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by the government is equal to the difference between P2 and P1. It is thus can be observed that
consumers are paying higher than before and the producers are receiving lower than before.
Hence, it can be said that both of the consumers and producers has lost some part of their surplus
due to introduction of buyer’s tax (Kolmar 2017). Before tax, consumer surplus was given as the
area including red triangle, blue triangle and yellow rectangle in the figure. Similarly, for
producers the surplus was given as the area covered by white triangle, orange rectangle and
green triangle. However, after the imposition of tax, the consumer surplus is given by red
triangle only and that of producer surplus is given by white triangle only. Therefore, the loss is
consumer surplus is given by yellow rectangle and blue triangle and the loss of producer surplus
is given by orange and green triangle. Therefore, total surplus before tax was denoted by the
entire consumer surplus and producer surplus. However, after the tax the total surplus is given by
red and white triangle and yellow and orange rectangle (Loomis and Haefele 2017). It is thus
evident that there is a loss in total surplus. Therefore, it is observed that after imposition of
buyers tax there is loss in all the surplus areas that is producer, consumer and total. The loss in
total surplus is shown as green and blue triangle in the figure and is known as deadweight loss of
social welfare.
(b) The imposition of buyer’s tax cannot raise social welfare because it has already can be
observed from figure 1 that there is deadweight loss after the tax. The deadweight loss means
there is loss in social welfare which is shown as green and blue triangle in the figure (Brusco and
Glass 2018). It is also evident from the figure that there is no addition of surplus area after the
imposition tax and thus the lost welfare has not been compensated from any other area. It occurs
because the resource allocation becomes in efficient after the tax and lower amount of housing
space or property is allocated to consumers at high price. Thus, there is loss in social welfare.

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(c) The government has imposed buyer’s tax and the amount of tax is shown in the figure. It can
be expressed as the difference between P2 and P1. Therefore, it is evident that government earns
revenue from the tax. However, before imposition of tax, the government used receive no
revenue from the housing market but after tax, the revenue is given as yellow and orange triangle
(Morita 2019). Therefore, government appropriated part of producer and consumer surplus as
revenue by imposing the tax. Hence, it can be inferred that introduction of tax has raised the
revenue of city government.
Answer 3
The city government of Melbourne acts as a monopolist. A monopolist can be an
individual, group or company who has the power to influence the market and has the control of
the overall market operation for a specific good or service. Thus, the city government has the
control of house market and effectively influence the market with its price structure (Chen and
Riordan 2015). There are large number of buyers and a single seller in a monopoly market,
which makes it efficient for firms to gather maximum profits by keeping a high price.

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Figure 3: Equilibrium price in monopoly market
Source: (Created by the Author)
(a) The objective of the city government is to maximize profits. Price of housing in the
new area
The objective of a monopolist is to maximize the profits. When a firm want to maximize
profit is generally restricts output and sell goods at a high price (Cavalli and Naimzada 2016).
Profit of a monopolist is maximized at the level where the marginal revenue is equal to the
marginal cost. Marginal revenue and marginal cost are used as the derivatives of total revenue
and total cost. The monopolist estimates profit and loss value as per the average cost (AC) curves
in order to estimate the production costs which is then subtracted from total revenue (TR).
Total profit = Total revenue (TR) – Total cost (TC)
The total profit is also estimated by multiplication of profit margin and quantity. Firms make
profit at a price level where the average total cost (ATC) is lower. Price needs to be kept above
ATC otherwise, monopolist will render loss. Profit is the area that lies below the demand curve
and above the ATC below P*m. Thus, when ATC is below the price P*m, firm earns profit as
the total revenue exceeds the total cost. However, profits will go down if P*m decreases and
ATC increases. As the average cost goes up, firms starts losing money. Total cost now becomes
AC * Q*m, while the revenue remains at P*m * Q*m such that TC becomes greater than TR.
(b) Price of housing when the objective of the city government is to maximize revenues
Total revenue (TR) is the multiplication of price and quantity.

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TR= (P*m) × (Q*m)
Revenue is maximized when value of TR is higher which is possible when either of the
values are higher or both are higher. Revenue is represented by area under the demand curve
below the price (Amador and Bagwell 2016). Generally, maximum revenue is obtained at a high
price and lower output level. Thus, firms will behave by setting a higher price such that MR
matches MC curve and ATC remains below the MC curve. The Q*m goes up to the demand
curve followed by price P*m, which is represented by rectangle.
(c) Housing price when government has the objective to maximize welfare
Welfare is maximized when monopolist does not sell the good in order to maximize profit
and revenue. Welfare is attainted when resources are optimally allocated such that every
individual in the society get equal share of the product. Therefore, in order to attain welfare firms
will set a price that is lower than the profit maximizing price and raise the optimum level of
output (Chen and Riordan 2015). The sale of the product will be at a level that is higher than
ATC but lower than P*m by raising the quantity beyond Q*m. Equilibrium price and output is
obtained at the point where MC cuts the demand curve (D), corresponding to which is the
welfare price and output (Cowan 2016). While doing this, the monopolist may undergo profit or
loss which is dependent on the elasticity of the demand curve. If the demand is elastic then profit
would be lower, whereas inelastic demand will have bigger profits.
Answer 4
Efficient policies are constructed that has stabilized the housing price. The United States
(US), China and Switzerland have policies that stabilize the performance of the housing markets.
These economies has effectively maintained a lower house price level that is crucial for

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economic growth. Switzerland has policies that is mainly concerned about fiscal decentralization
and lax zoning system. These polices are focused on encouraging the residential development
because it operates at a low ownership rate. The role is to make houses affordable because a low
house price encourage consumer spending of goods and services. This increased consumer
spending leads to a rise in economic growth due to smooth performance of the economies.
Switzerland is primarily concerned in sprawl and rent stabilization that lowers the house price.
The United States has unique housing policies that is effective for maintaining the house
price. The US applies the policy of fiscal federalism. Fiscal federalism is the process by which a
bureaucratic relationship is being maintained between the states and federal government to
regulate the various aspects of economy and provide special grants (Babaioff, Blumrosen and
Nisan 2017). The United States follows a policy that tightens the restiveness on of land usage
across the metropolitan areas. The economy use these policies to regulate the process of
homeownership and make it affordable to stabilize economic performance. It diligently follows
the policy of Mortgage Interest Deduction, which effectively maintains the land price from rising
beyond a definite level. This is because the demand for land is much higher in the urban areas
which raise the price in extraordinary level.
China has housing reform policies that has effectively improved the living conditions of
the economy and enhanced the business productivity (Basu and Bundick 2017). The reform
started the privatization and commercialization of urban public housing that encouraged home
ownership. China has a public policy that is designed in the development of affordable housing.
Government provides subsidies and profit caps for the developers that is has efficiently
supported the lower and middle income earners.

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The economy of Melbourne can adopt effective housing policies that will help to stabilize
the housing market and solve the problem of higher price level. The holding period needs to be
increased due to the imposition of Seller’s Stamp Duty from the current one to three years. A
high interest rate has a negative impact on the price of housing. Cost of mortgages increases with
a rise in the interest rate and creates a problem for the home buyers to make mortgage payments.
As a result, home buyers sell their houses and the amount of sellers go up (Kuttner and Shim
2016). This causes the price to fall. Melbourne is a prosperous city and the demand for the city is
gradually increasing which is causing the house price to go up. This can be maintained by the
implementation of Mortgage Interest Deduction policy, which enables homeowners to deduct the
interest rate paid on loans.
Melbourne needs to improve the formulation of housing subsidies, cash benefits and
reduction of mortgage amount from income tax. The Loan-to Value (LTV) ratio needs to be
maintained such that people are able to purchase the mortgage insurance which offsets the risk to
the lender and effectively changes the profit outcomes (Akinci and Olmstead-Rumsey 2018.).
This can be enhanced by maintaining the profit value and maintaining the high value of output.
The holding period for imposition needs to be increased such that people are able to pay the price
and balance housing market. The supply sides of housing needs to be maintained by Melbourne
such as provision of subsidies and upgrading the quality standard for housing.

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Reference
Akinci, O. and Olmstead-Rumsey, J., 2018. How effective are macroprudential policies? An
empirical investigation. Journal of Financial Intermediation, 33, pp.33-57.
Amador, M. and Bagwell, K., 2016. Regulating a monopolist with uncertain costs without
transfers. working paper.
Babaioff, M., Blumrosen, L. and Nisan, N., 2017. Selling complementary goods: Dynamics,
efficiency and revenue. arXiv preprint arXiv:1706.00219.
Basu, S. and Bundick, B., 2017. Uncertainty shocks in a model of effective
demand. Econometrica, 85(3), pp.937-958.
Brusco, G. and Glass, B., 2018. Attending to Inattention: Identification of Deadweight Loss
under Non-Salient Taxes.
Bullock, M. and Orsmond, D., 2019. House Prices and Financial Stability: An Australian
Perspective. In Hot Property (pp. 195-205). Springer, Cham.
Cavalli, F. and Naimzada, A., 2016. A multiscale time model with piecewise constant argument
for a boundedly rational monopolist. Journal of Difference Equations and Applications, 22(10),
pp.1480-1489.
Chen, Y. and Riordan, M.H., 2015. Prices, profits, and preference dependence. The Journal of
Industrial Economics, 63(4), pp.549-568.
Cowan, S., 2016. Welfare‐increasing third‐degree price discrimination. The RAND Journal of
Economics, 47(2), pp.326-340.

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Gurran, N. and Bramley, G., 2017. Housing, Property Politics and Planning in Australia.
In Urban Planning and the Housing Market (pp. 259-290). Palgrave Macmillan, London.
Hulse, K. and Burke, T., 2016. Private rental housing in Australia: political inertia and market
change. Housing in 21st-century Australia: People, practices and policies, pp.139-152.
Kolmar, M., 2017. Supply and Demand Under Perfect Competition. In Principles of
Microeconomics (pp. 55-82). Springer, Cham.
Kuttner, K.N. and Shim, I., 2016. Can non-interest rate policies stabilize housing markets?
Evidence from a panel of 57 economies. Journal of Financial Stability, 26, pp.31-44.
Loomis, J. and Haefele, M., 2017. Quantifying market and non-market benefits and costs of
hydraulic fracturing in the The United States: a summary of the literature. Ecological
Economics, 138, pp.160-167.
Lowe, P., 2017. Household debt, housing prices and resilience. Economic Analysis and
Policy, 55, pp.124-131.
Morita, S., 2019. Endogenous timing in tax competition and tax revenue orientation.