Demand, Supply, and Land Prices in Australian Metropolitan Areas

This essay examines the escalating land prices in Australian metropolitan cities, particularly focusing on Darwin, Sydney, and Melbourne. It identifies the major drivers behind these rising prices, including rapid population growth, increased demand for housing in central business districts (CBDs), foreign investment, and low mortgage interest rates. The analysis employs demand-supply dynamics to illustrate how increased demand, coupled with relatively inelastic land supply, leads to higher prices. Furthermore, the essay discusses the concept of land elasticity, arguing that the supply of land in metropolitan areas is perfectly inelastic, which exacerbates the impact of demand shifts on land prices. The document concludes by referencing relevant literature and highlighting the implications of fixed land supply on lot sizes in metropolitan cities. Desklib offers a platform to explore similar assignments and study resources for students.

Running head: BUSINESS ECONOMICS
Business Economics
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Table of Contents
Answer a..........................................................................................................................................2
Rising land price in metropolitan cities of Australia...................................................................2
Drivers of housing price in metropolitan cities...........................................................................3
Answer b..........................................................................................................................................4
Demand-Supply analysis of increasing land price.......................................................................4
Answer c..........................................................................................................................................6
Elasticity of land..........................................................................................................................6
References........................................................................................................................................9

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Answer a
Rising land price in metropolitan cities of Australia
The property market in Australia has experienced a dramatic turmoil in recent years. The
fluctuation in housing price is related to price movement of residential land. Land prices in
metropolitan cities of Australia have increased at a faster pace since the last decade. Soaring land
price is one of the main reasons behind housing affordability crisis in Australia.
The main factor pushing up land prices is the growing demand from farmers, investors
and builders. In Australia, the median land price raised to AUD 2278 as recorded in the last
quarter of 2017. With this land price accounted an annual rate of growth of 2.5%, highest since
the last 10 year. Land price in capital cities increased significantly in the last few years. The
price increase is associated with a decline in sales of lots overtime (Larder, Sippel and Lawrence
2015). Increasing demand for houses has pulled up the demand for lands raising land prices.
Strong population growth is another factor responsible for increasing land demand. Low interest
rate reduces the cost of investment encouraging people to invest more in property market raising
the demand for land. Two of the capital cities Melbourne and Sydney experienced largest
increase in average price of lands. Residential land was the most expensive in 2017 with median
price being $450000. The second largest expensive land market was Melbourne having a median
price of $330,000. This was followed by median land prices in Perth and Brisbane (Scutt 2019).
The figure below shows comparison of median land price in capital cities between December
2007 and December 2017.

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Figure 1: Median lot price in major capital cities of Australia
(Source: Scutt 2019)
Drivers of housing price in metropolitan cities
Soaring demand for houses associated with a relatively small supply of houses explains
the higher housing price in metropolitan cities in Australia. The first important factor of rising
house price is rapid growth of population in Australia especially in metropolitan cities. The
population growth in Melbourne exceeds the growth in other cities. Population growth in
metropolitan cities exceeds the rate of national average. The capital cities are more developed
relative to other parts of the country (Sisson, Rogers and Gibson 2019). These cities by providing
a higher standard of living and better job opportunities attract more people to live in capital
cities. Faster increase in population means a higher demand for houses causing housing price to
increase. It is not only domestic population that creates pressure on house price but also people
coming from other region increases pressure on housing demand. Capital cities in Australia are
regarded as most favorable areas offering a high living standard in world. Only two capital cities

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such as Melbourne and Sydney records more than 40 percent of national production in Australia.
The Central Business Districts (CBDs) are the most developed areas of Australia offering
maximum opportunities of employment and other economic opportunities related to high
standard of living. People in Australia and the immigrants now are willing to settle in or around
these areas (Dufty-Jones 2018). Growing demand from foreign nationals has been identified as
one major factors of growing house price in Australia. Share of foreign investment in Sydney
and Melbourne are 42% and 33% respectively.
Buyers from China constitutes a high demand for Australian housing. In California,
property bubble has been fuelled by increasing demand pressure from China’s buyer. There is as
such no regulation to restrict China’s investors to enter Australian market further increases
housing price in Australia.
In order to meet the growing demand of houses new houses have to be built in line with
demand. One barrier for increasing supply of new houses is rapid increase in price of average lot
size (Gurran and Phibbs 2017). The present inconsistency in supply of residential land
significantly interrupts housing supply. Builders have to wait a considerable long time for getting
residential land.
Growing demand and supply shortage of houses results in an increasing price of houses
in metropolitan areas of Australia.
Answer b
Demand-Supply analysis of increasing land price
The standard economic theory explains movement of price of a particular good in terms
of changing condition of demand and supply of the commodity. The economic definition of

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demand is the desire of people supported by the purchasing power of people. Supply on the other
hand represents willingness of sellers to supply different quantities at various price (Nguyen and
Wait 2015). Interplay of demand and supply in the market determines equilibrium price and
associated equilibrium quantity. Given any change in demand or supply or both causes
equilibrium to change resulting in an associated change in equilibrium price and quantity.
In case of land price, the scenario of increasing land price can be explained using the
demand and supply dynamics of land. There is a growing pressure on land demand in
metropolitan cities. A number of different factors has fueled Land demand. Firstly, demand for
houses in capital cities especially in CBDs are growing at a faster pace. Growing demand for
housing has an obvious implication for land demand as they complement each other. Land is the
key input determining supply of housing. Restricted land supply restricts supply housing supply.
Population in capital cities increases rapidly due to better employment opportunities and better
means of living. Along with domestic population, immigrants coming from different regions
creates pressure on housing demand, which in turn results in a higher demand for lands (Birrell
and Healy 2018). Foreign buyers especially those from China are one of the major drivers of
soaring property price. Faster increase in housing price attract more investors to invest in
property market leading to an increased demand for lands. Another driving factor for growing
land demand is the low mortgage interest rate. As a part of monetary policy expansion Reserve
Bank of Australia sets the mortgage interest rate to the lowest level. Lower interest further
attracts people to invest more into the property market. The larger growth in land demand
relative to the available supply increases price of land. This is shown in the figure below.

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Figure 2: Increased demand for land and effect on land price
In the given figure, D1D1 presents the demand for land. The associated supply of
residential land is give as S1S1. An increase in demand for land shifts the demand cure upward to
D2D2 leaving the supply curve unchanged at S1S1. In the land market, new equilibrium is
achieved at E2 (Serrano and Feldman 2018). As the equilibrium moves from E1 to E2, there is an
increase in land price to P2.
Answer c
Elasticity of land
Elasticity of supply is a measure capturing responsiveness of quantity supplied of a
commodity in response to a proportionate change in price of the good. Changes in quantity
supplied may be greater, less, or equal to changes in prices (Mochrie 2015). Accordingly, supply
is classified as relatively elastic, relatively inelastic or unitary elasticity. If supply does not

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change at all given change in price, then supply is considered as perfectly inelastic. In contrast, if
supply changes infinitely for a given level of price, then supply is considered as perfectly elastic.
One of the four primary inputs in production is land. Unlike capital, land is not a
produced factor of production. Rather land is a gift of nature. Size of land is fixed by the
geographical boundary of an area. As quantity of land cannot be changed, land price is
independent of its supply. Therefore, viewing from the economy as a whole land supply is
perfectly inelastic. However, if considered from the viewpoint of a single industry, supply of
land may not be fixed (McDonald 2018). This is because land supply in a particular industry may
be increased by shifting away land from some other industry.
The land supply in metropolitan areas is perfectly inelastic. Supply of land in
metropolitan cities cannot be increased following a higher demand resulting in a higher price of
lands. Each city has its own fixed land supply restricted by the geographic areas of cities. The
supply curve of land thus is a vertical line parallel to price axis having a value of elasticity equals
zero (Kolmar 2017). If supply curve is perfectly inelastic, then any change in demand is reflected
only on price. The fixed land supply is one primary reason of rapidly increasing land price. The
effect of perfectly inelastic land supply curve is explained in the figure below.

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Figure 3: Perfectly inelastic land supply
The straight line S1S1 shows the supply curve of land. Demand for land is presented by
the downward sloping curve D1D1. Equilibrium occurs at point E1. The equilibrium rent in the
market is r*. In response to growing demand for land, the demand curve shifts rightward to D2D2.
As a result, equilibrium moves up to E2. Consequently, equilibrium rent increases to r1 while
equilibrium amount of land remained fixed at L*. This explains the soaring land price in
different metropolitan cities of Australia. Additionally, because of fixed land supply, the average
size of lot decreases as distributed between more and more people (Cheshire and Hilber 2017). It
is evidenced that median lot size in the metropolitan cities has decreased along with an increased
demand and price.

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References
Birrell, B. and Healy, E. 2018. Immigration and the Housing Affordability Crisis in Sydney and
Melbourne. [online] Macrobusiness.com.au. Available at:
https://www.macrobusiness.com.au/wp-content/uploads/2018/07/APRI-Immigration-and-the-
housing-affordability-crisis.pdf [Accessed 8 May 2019].
Cheshire, P.C. and Hilber, C.A., 2017. The economics of land markets and their regulation (No.
331). Edward Elgar Publishing.
Dufty-Jones, R., 2018. A historical geography of housing crisis in Australia. Australian
Geographer, 49(1), pp.5-23.
Gurran, N. and Phibbs, P., 2017. Planning reform for affordable housing supply. Planning
News, 43(4), p.6.
Kolmar, M., 2017. Principles of Microeconomics. Springer International Publishing.
Larder, N., Sippel, S.R. and Lawrence, G., 2015. Finance Capital, Food Security Narratives and
A ustralian Agricultural Land. Journal of Agrarian Change, 15(4), pp.592-603.
McDonald, J.F., 2018. Mr. Ricardo's Theory of Land Rent. Journal of Real Estate Practice and
Education, 21(1), pp.1-15.
Mochrie, R., 2015. Intermediate microeconomics. Macmillan International Higher Education.
Nguyen, B. and Wait, A., 2015. Essentials of Microeconomics. Routledge.
Scutt, D. 2019. Data shows a huge underlying problem for Australian house hunters: land prices
have been soaring. [online] Business Insider Australia. Available at:

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https://www.businessinsider.com.au/australia-housing-affordability-new-land-price-population-
growth-2018-4 [Accessed 8 May 2019].
Serrano, R. and Feldman, A.M., 2018. A short course in intermediate microeconomics with
calculus. Cambridge University Press.
Sisson, A., Rogers, D. and Gibson, C., 2019. Property speculation, global capital, urban planning
and financialisation: Sydney Boom, Sydney Bust redux. Australian Geographer, 50(1), pp.1-9.