Economics Assignment: Analysis of House Rent Increase in Wellington

This economics assignment analyzes the recent increase in house rents in Wellington, New Zealand, interpreting the situation through economic principles. The report examines the impact of government financial aid provided to students, including increased borrowing and tuition fee waivers, and how these measures have influenced the housing market. It explains the issue using economic concepts of subsidies, demand, and supply dynamics, and how government interventions can lead to market distortions. The analysis highlights the rise in the Consumer Price Index and the subsequent increase in student demand for rental accommodations, particularly in Wellington. Due to the inelastic supply of houses, especially in the short run, the increased demand has resulted in higher rents. The assignment concludes that while government aid benefits students, it also contributes to increased demand for housing, thereby driving up rental costs. The report includes figures illustrating the Consumer Price Index and the effects of increased demand and inelastic supply in the housing sector, supported by references to relevant economic literature.

Running head: ECONOMICS ASSIGNMENT
Economics Assignment
Name of the Student
Name of the University
Author Note

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Increased House Rents in Wellington: Economic Interpretations
The economic scenarios in the markets for different commodities and markets depend
primarily on the supply and the demand side forces and their inter-dynamics, which in turn
leads to the determination of the price and quantity of the product or service in consideration,
to be produced in the market. While the demand side are represented by the buyers of
different products and services, the supply side shows the activities of the sellers of the same.
However, often leaving the dynamics of the demand and the supply forces in the
hands of market itself, without any intervention from the government of the countries may
lead to the creation of market distortions and biasedness where either one or both the parties
face loss of welfare. Thus, in some instances government restrictions and interventions are
required. However, the interventions of the government do not always create the desired
effects in an economy.
Keeping this into consideration, the recent crisis of an increase in the rent in the
housing accommodation sector of Wellington, in New Zealand is considered and the
plausible reason behind the same, which is highlighted by many to be the current financial
aids provided to the students in this region by the government, is viewed and interpreted in
the light of the theoretical and conceptual framework of economics.
Recent crisis of increased rent in Wellington
In the recent period, the government of the concerned region has taken several steps
to help the students, in the aspects of their cost of living while gaining educational degrees.
The primary steps which the government has taken is that of increasing the financial support
to the students including the increment in the amount which can be borrowed by the students
in terms of their cost of living while studying in the country (Rashbrooke, 2013). The
government has also removed the fees which the students needed to pay for the first year of

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their degree courses. The primary objective behind this intervention of the government of the
country, in the aspects of provision of financial supports to the students of the country, is to
shield the students from the high cost of living in the country, which can be seen from the
following figure:
Figure 1: Consumer Price Index of New Zealand over the years
(Source: Tradingeconomics.com, 2018)
As is evident from the above figure, the country has experienced a consistent increase
in the Consumer Price Index of the same, which in turn indicates towards the presence of an
overall high average price level and a high cost of living of the people in the country. This in
turn is expected to make it difficult for the students, who usually do not earn substantial
amounts of money or monthly wages, to sustain themselves and bear their basic minimum
expenditures, on amenities like food, shelter and clothing.
Given this situation, leaving the dynamics in the hands of market forces would have
become even more painful and economically hurting for the students of the country. Thus, the
steps taken by the government in terms of financial support and aid to the students seems to
be an optimal measure and policy framework. However, there are arguments against such
measures of the government in the aspect that the increased economic welfare of the students

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has led to the increase in the rent of the housings in the region, especially in Wellington,
known for its high economic, commercial and industrial activities.
Economic Interpretation of the issue
The argument regarding the direct linkage of the steps of the government in reducing
the cost of living of the students with that of the increase in the rents of the housings in the
regions can be explained in the light of economic concepts of subsidies and demand and
supply dynamics.
In economics, the term “Subsidy”, refers to the economic benefit which is usually
provided by the governing authorities to sections of people, in terms of financial aids or other
forms like tax allowances and cash grants to help the concerned section of people in some
aspects of their life (Auerbach et al., 2013). The provision of such economic benefits, help in
actually increasing the economic welfare of the receivers, often by increasing their
purchasing powers and monetary resources in hands. While for the producers, the subsidies
help in increasing their production and supply at affordable costs, for the buyers or
consumers, it helps in increasing their purchasing power and facilitating them to increase
their consumption basket as a whole.
This can be seen to be happening in case of the consumption patterns of the students
of the region in consideration. With the implementation of financial aids and subsidies as
well as various monetary reliefs on part of the government, the economic abundance and the
overall economic welfare of the students has increased, which in turn has led to the increase
in the purchasing power of the students. This in turn has led to an increase in their overall
demand for rented housing accommodations in the regions, especially like those of
Wellington, in the country, which in turn is expected to have contributed in the increase in the
rent of the houses in this region, as can be shown with the help of the following figure:

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Figure 2: Effects of increase in demand
(Source: As created by the author)
As is evident from the above figure, with the increase in the demand for a product, the
supply remaining the same, the price of the product is expected to increase and vice versa.
This has possibly happened in the housing sector of the country. Moreover, housing being a
fixed capital asset, the supply of the same cannot be increased considerably in the short run:

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Figure 3: Inelastic supply of houses in the short run
(Source: As created by the author)
Due to the presence of inelastic supply of houses, especially in the short run, the
increase in the demand for the same has been responded to by the home owners by increasing
the price of the same, that is by increasing the rent of the houses (Diamond & Tolley, 2013).
Thus, from the above discussion, it can be seen that the policies taken by the
government, in the aspects of helping the students by reducing their burden of cost of living,
although has helped them to a considerable extent, but has also led to an increase in their
aggregate demand for basic commodities and services which include housings, especially in
Wellington. This in turn, clubbed with the inelastic supply of rental accommodations,
especially in the short run, has led to the increase in the rents by the owners of the houses in
these regions.

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References
Auerbach, A. J., Chetty, R., Feldstein, M., & Saez, E. (Eds.). (2013). Handbook of public
economics (Vol. 5). Newnes.
Diamond, D. B., & Tolley, G. S. (Eds.). (2013). The economics of urban amenities. Elsevier.
Rashbrooke, M. (Ed.). (2013). Inequality: A New Zealand Crisis. Bridget Williams Books.
Tradingeconomics.com. (2018). New Zealand Consumer Price Index (CPI) | 1925-2018 |
Data | Chart. Tradingeconomics.com. Retrieved 28 April 2018, from
https://tradingeconomics.com/new-zealand/consumer-price-index-cpi