Analysis of Housing Supply and Demand Dynamics in Australia

This report provides an economic analysis of the housing market in Australia, focusing on the interplay of supply and demand. It examines the factors contributing to rising housing prices, considering both supply-side constraints and demand-driven investment behaviors. The report uses microeconomic concepts to illustrate market dynamics, including the impact of increased demand and potential supply adjustments on price levels. It also analyzes the current situation in the Australian housing market, referencing specific data and expert opinions. The analysis includes recommendations for government intervention, such as land release and demand-side policies like slab pricing, to stabilize the market and ensure affordability. The report concludes by highlighting the complex nature of the housing market and the need for a balanced approach to address both supply and demand challenges.

Running head: HOUSING SUPPLY AND DEMAND: AUSTRALIA
Housing Supply and Demand: Australia
Name of the Student
Name of the University
Author Note

1HOUSING SUPPLY AND DEMAND: AUSTRALIA
Executive Summary
The demand and supply forces in the market and their mutual interactions and dynamics
determine equilibrium in any market. These microeconomic tools also show the behavioral
patterns of the economic agents in the market and the overall condition of the market. The report
analyzes the working of these two mutually dependant forces in the backdrop of a real case
scenario. For study purposes, the article takes the market of housing of Australia, which s
currently experiencing a hike in the overall price levels. The report tries to find out the economic
reasons behind this phenomenon using demand-supply mechanism and in the concluding parts,
recommends the potential strategies that can be taken by the government of the country to bring
stability in the concerned market.

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Table of Contents
Introduction:....................................................................................................................................3
Housing Market:..............................................................................................................................3
Housing Market in Australia:..........................................................................................................4
Economic Analysis:.........................................................................................................................5
Recommendations:..........................................................................................................................7
References........................................................................................................................................8

3HOUSING SUPPLY AND DEMAND: AUSTRALIA
Introduction:
The dynamics of any economy as a whole and the markets in the economy specifically
depend upon the mutual interaction and behavior of the demand and the supply forces in the
market. The demand patterns portray the consumer behavior in general, while the supply
statistics are indirectly the portrayal the producer side of that specific market. The equilibrium of
any market depends upon the interactions of these two key forces, making them tools of key
significance for studying the economic conditions of any market or economy (Canto, Joines &
Laffer, 2014). The report, using these two microeconomic concepts, tries to analyze the
conditions of the market for housing in the current times in Australia. For the purpose of
studying the conditions of the concerned market, the article, “Housing affordability: Is more
supply the answer to driving down prices?”, by Julia Holman, has been considered
(Abc.net.au, 2017).
Housing Market:
In terms of economics, factors of production and resources can be broadly divided into
four categories, namely, land, capital, labour and organization. Among these four resources,
capital includes among others, the investments made in the economy in general. Investments on
houses can be regarded as a type of residential investment and therefore, by economic
definitions, housings fall in the capital resources category of any economy during a specified
period (Tsai, 2013). Housings are considered to be investment and not consumption because
though they are mainly used for staying purposes, they also add to the asset valuations of the

4HOUSING SUPPLY AND DEMAND: AUSTRALIA
individual who is investing on housing. To measure the growth of this market in any economy,
an indicator named “Housing Start” is commonly used. Housing start refers to the addition of
new residences or residential constructions, which are initiated in that particular economy within
a specified period. Much of the growth patterns and future prospects of housing markets can be
predicted with the help of the housing start statistics of any economy. In a housing market, the
construction companies form the supply side whereas the demand side generally consists of the
residents (Hulse et al., 2014).
Housing Market in Australia:
The study article discusses about the contemporary issue of a substantial hike in the price
levels of housings in overall economy of Australia, which has raised concerns among
economists, policymakers and government of that country. With the publication of the 2017
Federal budget just about two weeks before, one of the primary concerns of the Australian
government is going to be implementations of appropriate policies to control the continually
increasing housing prices in the economy (Abc.net.au, 2017). The article tries to incorporate
different views and perspectives regarding this unusual price hikes. According to the article, one
group of economists attribute this increase in housing prices to lack of supply of new housings in
the current period which implies a low value of Housing start index. This has raised concerns
among the central authorities, who are aiming towards reduction of the price-levels using supply-
side mechanisms, by increasing supply (Paciorek, 2013). However, another group of analysts
have countered this theory by stating that the increase in the current housing prices have very
less to do with supply dynamics. They have backed up their claim by contemporary housing

5HOUSING SUPPLY AND DEMAND: AUSTRALIA
data, mainly state specific, which shows that in places like Melbourne and Sydney, the supply of
new housings are growing at a faster rate than that of population growth, having little impact on
the price levels. According to them, the hike in the prices of the housings is majorly attributed to
the behavioral patterns of consumers. Housing being a type of assets, they argue that many
people are investing in this market for building up future assets than for staying (Hulse et al.,
2014). The high prices are acting as an incentive for these people as they are expecting prices to
rise more in future. These two schools of thought have been used by a third group who are
arguing that given the current situation, the prices of housings are not expected to fall with the
increase in supply. However, the prices can rise even drastically in absence of new supply in the
housing market due to the presence of substantial demand in the market. The article also takes
into account the possibility of releasing out land held by the Australian government, in order to
create future scopes of expansion of supply in the housing market of the country (Paciorek,
2013).
Economic Analysis:
The scenario discussed above can be explained with the microeconomic concepts of
supply-demand dynamics and market equilibrium. The argument of one school, regarding the
contributions of increased demand for housing in the price hike can be explained with the help of
the following diagram:

6HOUSING SUPPLY AND DEMAND: AUSTRALIA
PH Initial Supply
Final Supply
P1 E1
P2 E2
P0 E0 E0’
Excess Demand
D0 D1
0 Q0 Q1 Q2 Q0’ QH
Figure 1
From the above figure it can be seen that given a constant supply, the increase in demand
for housings can cause an excess demand for housing in the market, of amount Q0Q0’, at the
initial price level, P0, thereby, increasing the price level for housing to P1and taking the economy
from E0 to E1. In the new equilibrium, both the price and the number of housings are expected to
increase as is shown in the above figure (Abc.net.au, 2017).

7HOUSING SUPPLY AND DEMAND: AUSTRALIA
However, as according to some economists, an increase in the supply if not highly, can
bring down the price level to some extent. In Figure 1, an increase in the supply of housings can
be seen increasing the supply till Q2, thereby decreasing the price level to P2, thereby shifting the
new equilibrium to E2.
Recommendations:
It is evident from the above economic interpretation of the concerned problem in the
housing markets of Australia that the problem lies in both the demand side and the supply side.
To control the hike in the level of prices, therefore, two actions are required on part of the
government. On one hand, the government can release few of their land holdings, like those kept
for Commonwealth Games and others, to increase the scope for supply of housings in the market
(Wadud, Bashar & Ahmed, 2012). Impositions of restrictions on construction prices can also
help in toning down the intensity of the problem. On the other hand, restrictive policies to control
the excessive demand for housing by those who can afford, can also prove to be beneficial. Slab
pricing mechanism can be implemented for this purpose to make housing affordable for less
privileged class in order to ensure a welfare maximizing equilibrium in the market (Jordà,
Schularick & Taylor, 2016).

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References
Abc.net.au. (2017). Housing supply and demand in balance: Fitch. ABC News. Retrieved 7
August 2017, from http://www.abc.net.au/news/2016-11-30/housing-supply-and-
demand-in-balance-fitch/8080218
Abc.net.au. (2017). Will more housing drive down prices?. ABC News. Retrieved 24 August
2017, from http://www.abc.net.au/news/2017-04-25/is-supply-the-answer-to-housing-
affordability/8470552
Canto, V. A., Joines, D. H., & Laffer, A. B. (2014). Foundations of supply-side economics:
Theory and evidence. Academic Press.
Hulse, K., Pawson, H., Reynolds, M., & Herath, S. K. (2014). Disadvantaged places in urban
Australia: analysing socio-economic diversity and housing market performance.
Jordà, Ò., Schularick, M., & Taylor, A. M. (2016). The great mortgaging: housing finance, crises
and business cycles. Economic Policy, 31(85), 107-152.
Paciorek, A. (2013). Supply constraints and housing market dynamics. Journal of Urban
Economics, 77, 11-26.
Tsai, I. C. (2013). Housing affordability, self-occupancy housing demand and housing price
dynamics. Habitat International, 40, 73-81.
Wadud, I. M., Bashar, O. H., & Ahmed, H. J. A. (2012). Monetary policy and the housing
market in Australia. Journal of Policy Modeling, 34(6), 849-863.