Comprehensive Report: Demand and Supply of Homes in Australia (2017)

This report provides an in-depth analysis of the demand and supply dynamics within Australia's housing market, focusing on the affordability crisis. It examines factors driving increased demand, such as population growth, ease of access to credit, and government policies like negative gearing, alongside the constraints on supply, including infrastructure limitations and land use regulations. The report uses economic analysis, including graphical representations of demand and supply shifts, to illustrate the market imbalances. It concludes with recommendations for government intervention, emphasizing the need for policies that address both demand and supply-side factors to stabilize the market and mitigate the adverse economic effects of the housing crisis. The report also includes a comprehensive bibliography of relevant sources.

DEMAND AND SUPPLY OF HOMES IN AUSTRALIA 1
DEMAND AND SUPPLY OF HOMES IN AUSTRALIA
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Introduction
The article “Housing affordability: Blame supply for high prices, not tax breaks, says
former banker” by Alicia Barry on 8th April 2017 talks about imbalances in demand and supply
being encountered in Australia’s housing sector. The prices of homes have increased
significantly especially in two biggest cities, that is, Melbourne and Sydney. According to the
chairman of building firm Fletcher Group, Sir Ralph Norris, the surging demand has contributed
to higher prices of homes in Australia’s major cities. A significant population increase has
amplified the demand for homes. While the demand for homes is on the increase, there has been
a shortfall in supply to put the rising demand in check. Sir Ralph believes that lack of sufficient
appropriate infrastructures and issues arising from land release are impeding the provision of
homes. Moreover, government tax policies such as negative gearing are also contributing to the
rising prices of houses (Barry, 2017).
The crisis in Australia’s housing sector is not only an issue of concern to the Australians
but also the government. It is clear that most Australians especially the low and mid-income
groups are having difficulties in securing affordable housing units. One of the senior government
policy makers, also the governor of Reserve Bank, Dr. Philip Lowe, has also issued a warning
that the current crisis in Australia’s housing industry will be detrimental to the entire economy.
Economic Analysis
Demand for Homes
Australia is encountering a high demand for dwelling units. The rising demand for
housing units in this country results from non-price factors. Foremost, cities like Melbourne and
Sydney are encountering rapid population increase as individuals migrate to the towns in search

DEMAND AND SUPPLY OF HOMES IN AUSTRALIA 3
of better opportunities. As the population increases, the demand for homes also rises (Gurran &
Phibbs, 2013, p.384). In the past one decade, the cost of borrowing for homes has declined
substantially, and also there has been increased as access to credit. These scenarios together with
an increase in the incomes of Australians have helped to amplify the demand for accommodation
units. Furthermore, government policies such as negative gearing schemes and tax concessions
have contributed to the crisis in the housing sector. These plans give the investors an advantage
over the owner-occupiers in the housing market (BROWN et al., 2011, p.562). The investors
usually buy and retain houses in anticipation of profits on resale.
Graph 1: Increase in Demand for homes
Price
Number of houses
The increase in demand for dwellings in Australia’s housing market is demonstrated by
the shift in the demand curve from D0 to D1. As a result, the number of housing units required
has increased from Q to Q1, and the price increased from P to P1. This occurrence has led to
housing affordability crisis particularly among the low incomes earners.
The Supply of Homes
S
P1
P
Q1Q
D1
D0

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While the demand for dwellings in Australia is on the increase, the supply of homes has
not responded to the swelling demand and hence a shortage in the market. Studies show that
several factors are hindering the provision of new homes. For example, the key infrastructures
such as roads, water, electricity, and sewerage are not sufficient (Dufty-Jones & Rogers, 2016,
p.56). This situation is one of the discouragements to property developers in their efforts to
construct houses. Stringent land use policies are also curtailing the construction of houses due to
compliance costs involved. Additionally, government bureaucracy in the building industry is
limiting the development of homes (Davidson, 2016, p.53). The construction planning
procedures and the approval of buildings often face delays due to complicated and tedious
processes.
Graph 2: Shortage of Houses in Australia
Price
The factors mentioned above have limited the capability of supply to put the escalating
demand in check. The number of homes demanded by the consumers is Q3 while the property
developers supply Qe and hence a shortage in the market.
Recommendations
D1
D0
S
Qe Q2 Q3
P1
P2
Shortage
Number of houses

DEMAND AND SUPPLY OF HOMES IN AUSTRALIA 5
The affordability crisis in Australia’s housing industry poses a significant threat to the
well-being of the entire economy. For example, low and mid income employees in the public
sector will be unable to reside in the cities where they work, and this could lead to overall
reduction in their productivity. Moreover, unemployment levels will rise as private businesses
are unlikely to employ persons who cannot reside near their locations of work. Therefore, this
crisis requires comprehensive intervention to avoid the adverse effects on the economy. Since the
government has control of both demand and supply side factors, it has a critical role to play in
restoring the situation in the housing sector.
On the supply side, the government should give focus on creating an enabling
environment to facilitate the delivery of new homes. For example, the leadership should develop
sufficient key infrastructures such as roads, water, and sewerage in different locations to support
the efforts of property developers in building houses. There is a need to speed up the process of
approving buildings and elimination of unnecessary bureaucracies. Besides, relaxing stringent
land use policies will accelerate the delivery of additional dwellings. On the demand side, the
government should reduce the tax concessions provided to the investors (Yates & Berry, 2011,
p.132). Such schemes are encouraging speculative activities in the housing industry. Ensuring
adequate development of social amenities in other areas will also play a vital role in reducing
immigration levels in Melbourne and Sydney.
Conclusion
The surging demand and insufficient supply of homes have resulted in affordability crisis
in Australia’s housing market. The demand has been amplified by factors such as ease access to
credit, low cost of borrowing, population influx and negative gearing schemes. On the other

DEMAND AND SUPPLY OF HOMES IN AUSTRALIA 6
hand, stringent land use policies, inadequate provision of essential infrastructures and
government bureaucracies are some of the issues that are hampering the supply of homes. In
tackling the shortage of homes, the government should give emphasize both demand and supply
side factors. The demand-side policies will help reduce the surging demand while the supply side
policies will be instrumental in accelerating the delivery of new homes.

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Bibliography
Barry, A., 2017. Housing affordability: Blame supply for high prices, not tax breaks, says former
banker. [Online] Available at: http://www.abc.net.au/news/2017-04-08/blame-high-house-prices-
on-supply-not-tax-breaks/8427226 [Accessed 19h August 2017].
BROWN, R. et al., 2011. The Other Side of Housing Affordability: The User Cost of Housing in
Australia. Economic Record, 87(279), pp.558-74.
Davidson, N.M., 2016. Affordable housing and public-private partnerships. Routledge.
Dufty-Jones, R. & Rogers, D., 2016. Housing in 21st-Century Australia: People, Practices and
Policies. London ; New York : Routledge.
Gurran, N. & Phibbs, P., 2013. Housing supply and urban planning reform: the recent Australian
experience, 2003–2012. International Journal of Housing Policy, 13(4), pp.381-407.
Yates, J. & Berry, M., 2011. Housing and Mortgage Markets in Turbulent Times: Is Australia
Different? Housing Studies, pp.133-56.