Economics for Business: Australian Housing Market Analysis Report

This report provides a comprehensive analysis of the Australian housing market, examining its structure as an oligopoly, and delving into the factors that influence both the demand and supply of houses. It explores the impact of income, demographics, and interest rates on demand, while also considering land restrictions, local opposition, and profitability as supply-side determinants. The report further investigates the consequences of falling house prices on consumer behavior and economic growth, drawing on historical data and current trends. The study highlights the shifts in market dynamics, including changes in housing prices, foreign investment, and the rise of suburban lodging. It also discusses the impacts of housing on employment, wealth distribution, and overall economic well-being in Australia. The report concludes by summarizing the key findings and their implications for the Australian economy.

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Contents
Introduction......................................................................................................................................1
Background......................................................................................................................................1
Market structure...............................................................................................................................3
Factors Affecting Demand For Houses...........................................................................................5
Level of income...........................................................................................................................5
Demographics...........................................................................................................................5
Factors Influencing the Supply Of Houses......................................................................................6
The Restrictions in the Usage of Available Land........................................................................6
Opposition from the Locals......................................................................................................7
Profitability...............................................................................................................................7
Supply.......................................................................................................................................7
Impacts of Falling House Prices......................................................................................................8
Conclusion.......................................................................................................................................9

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Introduction
Housing is a fundamental factor for the people of Australia. Housing market has a very
significant influence over a number of economic aspects in society. Housing delivers a stable
base whereby we can contribute to the society from our families and hence enjoy retirement.
Housing also determines lifetime education, employment and the outcomes of an individual’s
health. Housing has a significant impact on investment in Australia. The consumption and saving
trends are also affected by housing sector across the Australian Economy. Research shows that
75% of tenants across Australia do not participate in the labor market.8% are employed but
seeking alternative jobs. The high percentage that stays in the houses without work is because
most of the dwellers are too young to be employed, old or disabled. Public tenants face high rates
of unemployment due to lack of skills.
Background
After world war two, the Australian population grew drastically and the urge for the
citizens to own a home in the suburbs and also in the inner city grew. In 1947, housing
ownership stood at 40% but this grew to 70% by 1960s (Beer, Bentley , Baker , & Mason, 2016,
p. 133). In 1980s, more environmentally friendly houses were built and the older houses were
abruptly renovated. It is also the season when the American styles for building mansions reached
Australia. The houses were built close to workers to appeal to them since they were close to their
places of work and who needed to avoid traffic (Alex , 2018, p. 12). Major population in
Australia also lived in town and hence there was a desire for more houses. By 1990, the houses
attracted many due to the convenience for most people since statistics show that 65% of the

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Australian population was living in the capital city (Beer, Bentley , Baker , & Mason, 2016, p.
45).
The birth of the 21st century came with its phenomenon since there was a rapid increase
in the number of people living in the city. The reports were astonishing since the number of
families was declining (Paris, 2017, p. 45). This increase in demand for houses was driven by the
increasing number of young Australians who seek to solve their financial problems in the city
(Dungey , Yanotti, & Wright, 2017, p. 35).
Impacts of housing on employment are mixed and affect even security and distribution of
wealth. Housing affects the wellbeing outcomes in Australia and also affects the quality of
dwellings. It reduces the after house poverty but at the same time increases the house prices
hence making houses less affordable for the low-income earners (Crabtree, 2016, p. 45). Housing
also reduces residential mobility and this is associated with the increased employment in
Australia.
The neighborhood of a tenant also has effects on employment prospects. Grouping the
people who are unemployed in a particular area would automatically lead to increased
unemployment since most of those people will not possess the ideas on where and how to get
employment opportunities (Nicholls, Maller, & Phelan, 2017, p. 24). The rising housing price
encourages consumer expenditure to increase and hence boosts the economic growth. A drop in
the housing prices leads to reduced consumer confidence and also affects the construction of
houses and lower economic growth. Currently, Australia is experiencing a fall in the housing
prices and this will have an impact on consumer behavior. Research shows that a 10% fall in
housing prices leads to a 0.7% in consumer expenditure.as the consumer expenditure falls, the

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rate of economic growth also slows down (Dufty-Jones & Rogers, 2016, p. 24). The net
collective fall in the real consumer expenditure is expected to fall in the growth rate of 45 bases
per annum from 2019 to 2020.this has a direct impact on the consumers GDP.
Market structure
The market structure followed here is oligopoly. Houses are similar with builders
competing in advertising. Differentiation is done on the roofing styles and interior design. The
suburban lodging market has been facing radical changes in the last 20 years in Australia (Beer,
Bentley , Baker , & Mason, 2016, p. 231). There has been a drastic rise in the housing prices in
the major cities like Brisbane, Sydney, and Melbourne. There has however been strict credit
strategy and lessened interest from the overseas investors in the suburban property. In the last
two years or so, the major cities have been facing a fall in housing prices. In the late 2000s
(Rowley , Leishman , Baker , Bentley, & Lester, 2017, p. 212), housing prices in Australia
relative to the income were amongst the highest in the universe. In 2011; the housing price was
about six times relative to the average income of a household. This led to the conclusion that the
country was experiencing a housing bubble. Additionally, reports released by ABS census and
population indicated that by 2012, the number of firms who had invested in real estate had
reached 117,000 plus (Dungey , Yanotti, & Wright, 2017, p. 24).
Australians saw it as a dream for them to own a house. The dreams nowadays seem to be
far than ever. Australia underwent a generational transformation for several decades (Tranter &
Donoghue, 2017, p. 143). When we consider the housing price to income ration in the last ten
years, there has been a 10% increase and this has made it difficult for young Australians to afford
a house. Housing prices are hiked in the major cities and the proportion of the houses put up are
less than the ones that were put up in the last 30 years. There has also been a decrease in the

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number of foreign investors in the Australian rental property (Dungey , Yanotti, & Wright, 2017,
p. 132). Throughout the years, the boom in the real estate sales to the investors has gone to the
lowest measure that they ever expected. The latter is associated with the increased taxes in
foreign investment and also the constraints from the investor’s home countries. Countries like
China limited their citizens from getting their money out of their country especially for the
purchase of property (Liu & Otto, 2017, p. 12). There has also been a decrease in the number of
median house prices in major Australian cities. Majority of the Australian households have
separate houses which are semidetached dwellings. Following the increase in housing prices, the
land price has also increased drastically. All these firms provided the same kind of products
(houses) but the products were differentiated on the building and roofing styles.
Owing to hiked housing prices, housing finance has become a bigger issue as well. It
took homeowners roughly six years to save a deposit for a house purchase (ABS, 2017). As a
result of the latter, the share of mortgage owners whose domiciles were worth less than the
amount they are owing went up and hence lesser and lesser Australians do not welcome the idea
of taking a loan to purchase a home.
Factors Affecting Demand for Houses
Level of income
Australia elevated its efficiency and ended up benefiting from the increased prices for its
shipments as a result of a boom. House prices also increased due to increased income. Research
shows that households opt to spend more of their income on refining the quality of their housing
(Beer, Bentley , Baker , & Mason, 2016, p. 23). There has also been augmented demand for
holiday homes mostly in the coastal regions. There is increased income because for most

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families, both partners are working hence they demand good housing. Incomes have increased at
almost a similar pace across all income quintiles (Dungey , Yanotti, & Wright, 2017, p. 243).
However, there are still some people whose capacity to save has been high and therefore they
have been able to increase their bid for houses than other workers.
Demographics
The average size of households has depreciated due to late marriage and increased
divorce. This has led to increased demand for houses for a given population. Australia has a
strong population growth which is responsible for the advancing economy (Nicholls, Maller, &
Phelan, 2017, p. 132). The strong population is associated with increased immigration when
compared to comparable countries. Increased immigration has led to increased demand in
housing since the immigrants in most cases are young adults. Immigrants tend to head to places
where there is a shortage of houses like Sydney and Melbourne instead of going upcountry
(Beer, Bentley , Baker , & Mason, 2016, p. 143).
Increased Rent
The increased rent in the recent past has made people yearn for their own homes instead
of renting. On the other hand, paying high rent has reduced the ability of the households to save
the deposits (Dungey , Yanotti, & Wright, 2017, p. 156).
Decreased Rates of Interests
The decrease in the standard home loan interest rates increased the number of households
and gave people the ability to bid up to the house prices. For instance, the repayment of a
mortgage for 30 years at $ 100,000 at a 14% interest made it possible for people to demand more
houses since it meant that a person will only be required to pay $ 1185 per month (Rowley ,
Leishman , Baker , Bentley, & Lester, 2017, p. 165). The lowering of the loan interests was due

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to the lowering of the RBA policy interest rates .increase in competition has led to a lessening in
the sideline amid policy and interest and the lodging mortgage rate (ABS, 2017).
Factors Influencing the Supply of Houses
The Restrictions in the Usage of Available Land
Planning and restrictions have been a big issue in the government of Australia. The
government sets aside areas that are not to be built and then the land left for construction in
several cities is very small compared to the increasing population (Beer, Bentley , Baker , &
Mason, 2016, p. 45).
Opposition from the Locals
The local communities are not in for the idea of the construction of new homes since the
communities like living in those small villages (Dungey , Yanotti, & Wright, 2017, p. 143). The
argument here is that the small villages are not congested but with increased housing, the villages
will be congested and this would bring about several disadvantages like insecurity and pollution
(Dungey , Yanotti, & Wright, 2017, p. 165).the local communities are also live in fear that their
land might be taken and then they fail to be fully compensated.
Profitability
Profitability is much dependent on the demand for new houses and also the prices. When
there is a boom, the builders in Australia build more houses. When the housing prices start to
fall, the builders build fewer houses and hence the supply goes down till boom (Tranter &
Donoghue, 2017, p. 35).when there is emergence of new houses, the level of profits will rise and
when the housing supply is low, the level of profits will decline. This will have an overall effect
in the real GDP and hence slowed economic growth.

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Supply
Pliability of lodging supply refers to the degree of the receptiveness of the number of
houses provided to the alteration in the charge of housing. At one extreme, there is a perfectly
inflexible supply when the price elasticity of housing supply is zero (Dungey , Yanotti, &
Wright, 2017, p. 132). The latter has had severe impacts on the number of houses supplied. At
the other extreme, there is perfect elasticity whereby the small changes in the houses have been
noted to lead to an increased change in the number of houses demanded.to date, the issue of
housing supply and demand has been dominant in the Australian government agenda with the
recent reports showing that there is a decreased supply in the housing sector (Dungey , Yanotti,
& Wright, 2017, p. 112). At the other side, there is immaculate versatility whereby the minute
changes in the number of domiciles have been noted to prompt an expanded change in the
quantity of houses demanded. To date, the issue of lodging free market activity has been
predominant in the Australian government motivation with the ongoing reports appearing there is
a diminished supply in the lodging division.
Impacts of Falling House Prices
Housing prices have fallen drastically in a single quarter since 2008. Compared to 2017
peak; cities like Sydney and Melbourne have experienced a fall in the housing prices. By
December 2018, housing prices in Sydney had dropped by 20%. The graph below shows the
annual change in housing in different cities in Australia (Beer, Bentley , Baker , & Mason, 2016,
p. 76).

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(Dungey , Yanotti, & Wright, 2017, p. 131).
The above diagram shows that at the end of the year, the pace picked up. In December,
prices in Sydney dropped by 3.9% and Melbourne by 3.2% (Dungey , Yanotti, & Wright, 2017,
p. 132). A fall in the housing prices will lead to increased demand for the houses and the supply
will reduce as shown in the diagram below.

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(Dungey , Yanotti, & Wright, 2017,
p. 68).
Conclusion
The housing sector has been one of the most important sectors for the Australian
government. The sector plays a big role in contribution of revenue for the Australian
government. New houses built have seen increased economic growth for the country in the last
20 years. Housing prices have been so rampant and hence people have been struggling to possess
permanent homes due to increased rent. Banking institutions, on the other hand, have been so
strict in giving loans. The strict measure put in acquiring loans and other several factors has led
to a decrease in house supply in Australia. There is a need for the government to lay down
measures that will see more land being availed for the investors to continue building houses
since the population in cities is growing and hence increased demand for houses.

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References
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from Australian BUreau of Statistics:
https://www.abs.gov.au/ausstats/abs@.nsf/0/88BF225497426920CA257F5C000989A8?
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