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Australian Housing Market Review Analysis

Paper Type: Free Essay Subject: Economics
Wordcount: 3788 words Published: 24th Nov 2017

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The main theme of the current article, “Australian Housing Market Review,” by Amhem Investment Management, November 2012 is to analyze the relationship between the housing ownership and the demographic structure of Australia, it also emphasizes the factors which impact on the ownership of houses and the reason for overvaluation of houses in Australia.

Owning a house is a major decision of any person in his life, it is one of the biggest investment and asset of the people. In case of Australia’s economy investment in housing accounts for only 5% of the Australia’s GDP as compare to US which accounts for 12% of GDP. In Australia around 70% people owns their own house.

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It has been observed that people between the age group scales 20-44, are the key house purchasing segment. Thus the demographic structure of a country has an impact on the investment in the housing project. By analyzing the Australian demographic pyramid it has been observed that there has been surge in the population of people in between age group 20-44. According to census the percentage of people in the aforesaid age group will expand by 4.6% p.a., which leads to an increase in the investment in houses and thus leading to an appreciation in the house prices.

Australia is a less populated country. As per the census in 1911, the number of person dwelling in a house in Australia was around 4.5. This average number of person dwelling has consistently fallen and by 2006 this almost halved to 2.4. This is caused due to smaller families, older people living apart being financially independent, high rate of divorce etc.

We know that demand and supply forces help to determine the price of a commodity. The same applies to housing also. In Australia the housing demand growth is approximately around130, 000 p.a. There has been continuous under and over supply of housing. In 2012 there has been under supply of housing, thus leading to an increase in the price.

Other than demand and supply, there are various factor which has impact on the prices of the houses. The price of houses shows an upward movement until the Global Financial Crisis. Another factor is affordability, this in turn depend on the availability of finance, rate of interest, tax effect on the investment and sale of house, incentive available, government support, housing schemes, availability and cost of raw material.

Recently it has been noticed that there has been a bubble rise in the housing prices, which is not good for the economy of the country. This generally impacts the financial market of the country and leads to financial instability. The main reason for such bubble rise in the housing prices are:

  1. Banking companies are the leader in providing housing loan. Thus excessive competition and aggressive lending is one of the factor for bubble rise in price of houses.
  2. Various default has been found in the repayment of housing loans.

But Australia condition is far much better than its peer country. Because the total investment is 5% of total GDP moreover the Australian financial condition is much better than other countries. In Australia there is recourse of bankruptcy.

Thus finally we can conclude that Australian housing condition is quite stable due to its favorable demographic structure, a balanced level of overbuild, the number of person dwelling per house has improved favorably. Prices are to stable as per the price to wage ratio and the price per square meter was also quite favorable. Thus all this factors leads to stable and favorable prices of houses in Australia.

Answer to Q2:

Australia is the largest country in the world. It has very diversified range of standard of living, employment opportunities and lifestyles. Australia is a very good place to live as it has great economic opportunities, employment, transportation facilities, health care etc. All this factors lead to immigration of people from various other countries. For all this reason the housing price in Australia has risen because of limited supply of houses.

Owning a house is a major decision of any person in his life, it is one of the biggest investment and asset of the people. In case of Australia’s economy investment in housing accounts for only 5% of the Australia’s GDP as compare to US which accounts for 12% of GDP. In Australia around 70% people owns their own house.

It has been observed that people between the age group scales 20-44, are the key house purchasing segment.

Now here I want to focus on the Melbourne Housing Market. Melbourne is one of the most expensive and renowned city of Australia. Here the standard of living very high.

Melbourne housing market is not proper and its fundamentals are very weak. The reason for such are:

  1. The growth in the house prices rises unexpectedly above the national capital city average;
  2. The house prices are expensive on a price to income basis;
  3. The rent is very low in Melbourne.

The chart shown below represents the comparison between the Melbourne Housing market and that of the national capacity average since 1987. Melbourne has the second most expensive capital city housing market in Australia.

From the chart it has been observed that Melbourne housing market experienced a lower growth as compared to the average capital city. This is so because the rent in the capital city has increased significantly by 17% where as in Melbourne the rent has been increased by only 5%.

Among the all the metropolitan cities in Australia, Melbourne shows a decent dwelling, i.e. the number of person per house are quite higher than the average of 2.66 per house of Australia. The following chart represents the comparison of the dwelling of different cities of Australia.

The main reason for the Melbourne’s sluggish growth in the rent is due to the high rate of construction of houses in Melbourne as compared to other cities. This lead to excess in supply than demand. We know that demand and supply forces effect the price of any commodity, the same thing applies to the sale and purchase of houses also. As the supply of houses i.e. the construction of house in Melbourne is more than required, it leads to a decrease in the prices of the houses in the Melbourne. The number of houses being unsold is very high which leads to low rentals.

Now here we shall analyze the reason for increase in the construction of houses in Melbourne.

For development of houses the Australian government has given many incentives in the form of foreign direct investment, tax benefit and various other incentives. All this factors allows the construction concern to construct more house. So the construction of houses increases in a greater pace than the population.

From the above analysis it has been observed that the housing prices in Melbourne is not overvalued instead it is undervalued because of excess of supply than demand. So investing in the house property in Melbourne is not a prudent decision due to lower rental income and chances of house being remain unsold are very high.

Answer to Q 3:

Owning a house is a major decision of any person in his life, it is one of the biggest investment and asset of the people. In case of Australia’s economy investment in housing accounts for only 5% of the Australia’s GDP as compare to US which accounts for 12% of GDP. In Australia around 70% people owns their own house. Australia has very diversified range of standard of living, employment opportunities and lifestyles. Australia is a very good place to live as it has great economic opportunities, employment, transportation facilities, health care etc.

In the question it is assumed that Melbourne’s Housing Market is perfectly competitive market .i.e.:

  1. There are large number of real estate developers;
  2. There are large number and different categories of buyers;
  3. The buyers have perfect and complete knowledge about the price of the market;
  4. The market has similar and competitive house price;
  5. There is huge expenditure in advertisement;
  6. Free entry and exit of real estate developers;
  7. The prices of the houses are determined by the demand and supply forces.

Now in the perfectively competitive market, the city government of Melbourne imposes buyer’s tax (specific tax) on the purchase of every house.

This imposition of buyers tax i.e. the tax which the buyer of the house is required to pay at the time of purchasing the house, will lead to extra burden on the buyers thus the society as a whole.

The impact of this specific levy on different aspects is given below:

  1. The impacts of this buyer’s tax on the equilibrium housing prices, consumer surplus, producer surplus, and total surplus (or social welfare).

We know that in perfectly competitive the price of commodity is determined by demand and supply forces. Now with the levy of specific buyers tax there arises an extra burden on the buyer, they are now required to pay extra for purchasing the houses. This reduces the willingness of the buyer to purchase the house, thus leading to decrease in demand. Now the supplier would incur loss if the demand of the house decreases by imposition of houses. Thus in order to maintain the demand of the product, the supplier would decrease their house prices in order to bring the total cost to the buyer at a reasonable level. It is not possible for the supplier to bring down its price so as to cover the entire tax burden. Thus the burden to a little extent is absorbed by the seller. But the overall cost to buyer increases. Now comes the concept of consumer surplus. After the imposition of taxes the consumer surplus decreases, as the consumer now has to pay more for the same product, assuming no simultaneously increase in the income.

With the imposition of buyer’s tax the surplus of the consumer is either remains same or decreases if the sellers reduce its price to maintain the demand, because the tax is imposed on buyers and not on sellers.

This imposition of tax has neutral impact on the social welfare as though the consumer surplus decreases but at the same times the government revenue increases, which will be expended for social welfare only.

All this can be illustrated by an example:

Let the house price initially before levy of tax be $ 100,000, now after the imposition of tax @ 20% on the selling price of house. To maintain its demand the supplier reduces its price to $ 99,500, thus the cost to the buyer becomes $ 119,400. Thus the levy of buyers:

  1. Increases the price by $ 19,400;
  2. Reduces the buyer’s surplus by $ 19,400;
  3. Reduces the supplier’s surplus by $ 500.
  1. Impact of buyer’s tax on social welfare

Purchase of house in Australia is the dream of every Australian. The houses are quite expensive in Australia as compared to other countries. Thus the houses are generally purchased by well settled families. Now with the imposition of buyer’s tax the burden on the people buying the houses increases thus reducing consumer surplus,but at the same time the government revenue increase. So with the introduction of such tax money from the rich people is transferred to the government, and this money can be utilized for the general welfare of the public. The money so collected from tax can be used for the development of the society. Thus with the imposition of the buyer’s tax on the purchase of houses increases the social welfare of the economy as a whole.

(c) Impact of buyer’s tax on city government revenue.

Tax is collected by the government of the country in order to generate revenue for the welfare of the people residing in the country and for the development of the nation as a whole. Thus with the imposition of buyer’s tax on the purchase of houses increases the revenue of the city government on the one hand but at the same time with the imposition of tax the cost of houses to the customer increase leading to decrease in the revenue of the government form direct taxes. But the overall implication of imposition of buyer’s tax is increasing the city government revenue.

Answer to Q 4:

The government plays a major role in the development of the housing market in a place. This is because acquiring a house property requires a huge amount of investment. The investment on the other hand depends on the financial market of the place. Now in turn the financial condition in an economy depends on the fiscal & monetary policy of the company. These fiscal and monetary policies are governed and regulated by the government of the country. Thus indirectly the government fiscal and monetary policies impact the development of the housing market in an economy. For instance if the Reserve bank of Australia increases the interest rate than the investment in housing project will be reduced.

The government can also impact the housing market by providing incentive to the real estate developers, by framing policies regarding the sources of finance for development of housing project. Moreover sometimes the government may also sometimes involve in the development of affordable housing development to help the poor people to own the house for their living.

In the given question the city government decides to develop a new housing area, in other words the government is acting like a monopolist.

Now here we have to analyze the prices of the houses in different objectives of the city government:

  1. The housing price set in this new area, if the objective of the city government is to maximize profit.

If the objective of the government is to maximize the profit, then the city government is required to increase its price. Since with the increase in the price the profit margin per house will increase, but at the same time the overall profit may reduce due to decrease in demand.

This can be illustrated with the help of an example:

Scenario

Price ($ ‘000)

Cost

Profit

Demand

Supply

Revenue

1

$ 1,000.00

$ 700.00

$ 300.00

1000

1200

$ 1,000,000.00

2

$ 1,500.00

$ 700.00

$ 800.00

800

1200

$ 1,200,000.00

3

$ 2,000.00

$ 700.00

$ 1,300.00

640

1200

$ 1,280,000.00

4

$ 2,500.00

$ 700.00

$ 1,800.00

530

1200

$ 1,325,000.00

5

$ 2,700.00

$ 700.00

$ 2,000.00

400

1200

$ 1,080,000.00

6

$ 800.00

$ 700.00

$ 100.00

1100

1200

$ 880,000.00

7

$ 900.00

$ 700.00

$ 200.00

1000

1200

$ 900,000.00

8

$ 2,800.00

$ 700.00

$ 2,100.00

300

1200

$ 840,000.00

From the above illustration has been observed that with the increase in price the profit of the city government, but the overall revenue decreases.

  1. The housing price set in this new area, if the objective of the city government is to maximize revenue.

In order to maximize revenue the city government is required to reduce the price of the houses, this will lead to an increase in the demand of the houses, i.e. more people may be able to purchase the house and thus the overall revenue of the city government.

This can be explained with the help of an example:

Scenario

Price ($ ‘000)

Cost

Profit

Demand

Supply

Revenue

1

$ 1,000.00

$ 600.00

$ 400.00

1000

1200

$ 1,000,000.00

2

$ 950.00

$ 600.00

$ 350.00

1100

1400

$ 1,045,000.00

3

$ 800.00

$ 600.00

$ 200.00

1350

1600

$ 1,080,000.00

4

$ 750.00

$ 600.00

$ 150.00

1450

1800

$ 1,087,500.00

5

$ 700.00

$ 600.00

$ 100.00

1600

2000

$ 1,120,000.00

6

$ 650.00

$ 600.00

$ 50.00

1790

2200

$ 1,163,500.00

7

$ 600.00

$ 600.00

$ –

1900

2400

$ 1,140,000.00

8

$ 550.00

$ 600.00

$ (50.00)

1930

2600

$ 1,061,500.00

From the above illustration it has been observed that with the decrease in price the profit per house decreases but the overall revenue of the city government increases.

  1. The housing price set in this new area, if the objective of the city government is to maximize welfare.

In order to increase the social welfare, the government has to charge price strategically.

For instance big houses with proper furnishing and other amenities cost very high and generally acquired by rich people. On the other hand small houses with necessary amenities are built for average and poor people as they cannot afford high prices. In this scenario the city government is required to charge high prices for those big houses and less price for small affordable houses. This will lead to maintenance of the revenue of the government on one hand and less hardship and relief to the poor. Because the wealth from rich people comes into the hand of the government, which can be utilized for the general welfare of the society as whole.

Answer to Q 5

Purchasing a house is a major decision of any one as it require huge amount of money. To greater extent, acquiring a house property depends on the financial position of the buyer but at the same time it also depend on the housing policies or measures adopted by the government of the country in which the buyer is residing.

The house property requires a huge amount of investment. The investment on the other hand depends on the financial market of the place. Now in turn the financial condition in an economy depends on the fiscal & monetary policy of the company. These fiscal and monetary policies are governed and regulated by the government of the country. Thus indirectly the government fiscal and monetary policies impact the development of the housing market in an economy.

There are many countries which had very sound and fantastic housing policies to control and stabilize the housing market, and helps in the growth of real estate business. For instance:

  1. From Asia- Pacific Region: Australia, China, Hong Kong SAR, Japan, Indonesia;
  2. From Central & Eastern Europe: Bulgaria, the Chez republic, Poland;
  3. India

Let us explain the policy and measures adopted by the Indian government to stabilize the Housing Market. In India at the time of purchase, the buyer is required to register its house with the stamp duty department who charges around 1%-2% of the total value of the house.

Moreover for poor people it has developed many affordable housing project schemes. To encourage owing of houses it has proved many incentives in direct taxation purpose.

Melbourne is one of the most expensive and renowned city of Australia. Here the standard of living very high. Melbourne housing market is not proper and its fundamentals are very weak. Due to huge government incentives and low interest rate, there is overbuild position in Melbourne i.e. the supply of houses are more than demand. All this factors lead to an unstable housing market in Melbourne. In order to stabilize the same the measure which may be adopted are:

  1. Increasing the interest rate;
  2. Providing incentives to the buyer in order to encourage them to purchase house property for instance easy house loan;

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