Demand and Supply of Land in Australia: Effects on the Housing Sector

This essay examines the demand and supply dynamics of land in Australia and their impact on the housing sector. It highlights the limited supply of land and the increasing demand driven by population growth, low interest rates, and rising incomes. The analysis uses supply and demand curves to illustrate the price effects and discusses government policies that influence the market. Recommendations include easing planning restrictions, reforming negative gearing policies, and increasing taxes to stabilize the market. The essay concludes that effective land utilization and policy adjustments are crucial for addressing housing affordability challenges in Australia. Desklib offers a wealth of resources including similar essays and study tools for students.

Running head: ECONOMICS ASSIGNMENT
Demand and Supply of Land in Australia
Name of the Student:
Name of the University:
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1ECONOMICS ASSIGNMENT
Introduction: Essence of the story
Land is one of the four factors of production. It is a natural resource and its supply is
limited. Land is required for all types of goods production, from agriculture to industry, and
hence, land plays a major role in all types of economic activities of a nation. The demand for
land resource is persistent in all sectors, while the supply of the physical land is limited by nature
(Baumol and Blinder 2015). Hence, in the modern world, there is always excess demand for land
in the market and to reach the market equilibrium, the price of land is higher.
In Australia, the demand and supply of land plays a major role in the housing sector. The
price of housing has been soaring very high in the past few years due to excess demand for
houses, which in turn depends heavily on the supply of land. According to a report by Scutt
(2017), the soaring prices of land indicates that the housing affordability is unlikely to improve
in Australia in the near future. It is seen that land is incurring the largest part of the total cost in
purchasing properties and the prices are increasing considerably faster than income or inflation
in the country (Aph.gov.au 2018). The primary reason for this is the fixed supply of physical
land in the country. In this paper, the demand and supply of land in Australia and its impact on
the housing sector prices are discussed.
Economic analysis
As highlighted by Pindyck and Rubinfeld (2014), since the supply of land is fixed by
nature, it can be said that the supply curve of land is perfectly inelastic. The rise or fall in
demand only affects the price of land, while supply remains fixed. According to the law of
demand, as price of a good or service rises (falls) for a product, the demand falls (rises), other
things remaining the same. Hence, price and demand have an inverse relationship and therefore

2ECONOMICS ASSIGNMENT
Price
Supply of land
D2
D1
Q*
E1
P2
P1
E2
SL
Perfectly inelastic supply
curve of land
has a downward sloping curve. On the other hand, according to the law of supply, rise (fall) in
the price of a good or service leads to rise (fall) in its supply in the market, ceteris paribus.
Hence, there is a direct relationship between the price and supply of a product and supply has an
upward sloping curve. During excess demand, price rises to yield equilibrium and during excess
supply, price falls to reach market equilibrium. However, when any other influencing factor than
price changes, there is a shift in the position of the demand or supply curve (Nicholson and
Snyder 2014).
The supply curve of land is vertical because it is perfectly inelastic, that is, a rise or fall in
price cannot change the quantity supplied of land as it is fixed by nature. Hence, that can only
affect its demand or vice versa. As demand for land rises, there is excess demand in the market
for land and there is a rise in its price, as shown in the diagram below.
Figure 1: Demand and supply of land
(Source: Author)

3ECONOMICS ASSIGNMENT
Price
Supply of housing
D2
D1
Q2
E2
P2
P1
Q1
E1
SH
Relatively inelastic
supply curve for housing
Australia has been facing a tough challenge in meeting the excess demand for housing.
The demand for housing has grown multiple folds due to increase in population (citizens and
migrants), increase in the industrial and service sector revenue, record low in the interest rate and
increase in the disposable income of the people, while the land supply was 10% less than that
was at the same time a year ago (Scutt 2017). Hence, all the big cities of the nation have been
experiencing the high rise in the price of housing and land.
Figure 2: Demand and supply of housing, based on the demand and supply of land
(Source: Author)
The figure above shows the supply curve of housing as relatively inelastic because, the
real estate industry can slightly increase the supply of housing through multistoried apartments.
However, as that is also limited, a rise in price is more than the rise in corresponding supply. In
Australia, the scarcity of land has led to excess demand in the market and hence, has pushed the
price for land upwards (Garrett 2018).

4ECONOMICS ASSIGNMENT
Recommendations to the key players
Since the Australian government is trapped in a cycle of housing policies and rising
housing prices, it has been found that the government policies are responsible for pushing up the
demand and restricting the supply, resulting in soaring high prices. To solve this problem, the
Australian government must lift the planning restrictions, such as, the zoning regulations that
prevent from making tall apartment buildings. As free land is not available easily, hence, the
industry should make innovative plans to utilize the available land in the most efficient manner.
Another big issue in the land and housing market is the negative gearing, which allows
the investors to buy housing and rent those out and if they are able to pay back more on the
mortgage than rent earning, then they can subtract the amount from the tax liabilities (Winsor
2016). This policy should be ditched as it raises the rent price, making it all the more expensive
for the consumers. Lastly, increase in tax can make the land and housing less attractive, thereby
reducing the excess demand in the market.
Conclusion
The rising prices for housing and land has been a major economic problem in Australia
for the past decade. There have been many policies to stabilize the market, but rapidly increasing
demand from increasing population, lower interest rates, tax subsidies and rise in income had
contributed significantly in the rising demand for land and housing, while the supply of land
remains fixed. To mitigate this persistent problem, the government should make some changes in
its planning policies, which includes changing the planning restrictions, raising taxes and
reducing other facilities for the investors. The Australian government must take measures on
effective utilization of the available usable land to stabilize the market.

5ECONOMICS ASSIGNMENT
References
Aph.gov.au, 2018. Chapter 4 - Factors influencing the demand for housing – Parliament of
Australia. [online] Aph.gov.au. Available at:
https://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Former_Committees/hsaf/
report/c04 [Accessed 25 Apr. 2018].
Baumol, W.J. and Blinder, A.S., 2015. Microeconomics: Principles and policy. Cengage
Learning.
Garrett, S., 2018. Land supply at heart of affordability challenge. [online] The Real Estate
Conversation. Available at: https://www.therealestateconversation.com.au/land-supply-heart-
affordability-challenge/australia-land-supply/supply-and-demand [Accessed 25 Apr. 2018].
Nicholson, W. and Snyder, C.M., 2014. Intermediate microeconomics and its application.
Cengage Learning.
Ong, R., 2017. Governments trapped in a vicious cycle of housing policies and prices. [online]
ABC News. Available at: http://www.abc.net.au/news/2017-04-04/governments-trapped-in-
vicious-cycle-of-housing-policies-prices/8414008 [Accessed 25 Apr. 2018].
Pindyck, R.S. and Rubinfeld, D.L., 2014. Microeconomics.
Scutt, D., 2017. Soaring land prices are a sickening sign that housing affordability in Australia
is unlikely to improve. [online] Business Insider Australia. Available at:
https://www.businessinsider.com.au/australia-housing-affordability-land-costs-2017-10
[Accessed 25 Apr. 2018].

6ECONOMICS ASSIGNMENT
Winsor, B., 2016. How to lower house prices (and why it will never happen). [online] The Feed.
Available at: https://www.sbs.com.au/news/the-feed/how-to-lower-house-prices-and-why-it-will-
never-happen [Accessed 25 Apr. 2018].