Property Prices in Sydney

Sydney Property Prices

Executive Summary

In early March 2014, the governor of Reserve Bank, Glenn Stevens, warned house owners that Sydney property prices including houses will keep rising. For this reason, he cautioned home buyers never to borrow so much debt because, like the house prices are anticipated to continue rising, they can equally fall. Foreign investors have been moving to Australia at a very high rate especially those from China. The business people increasingly buy houses in Australia particularly those at the hot Sydney market. This has caused Sydney house prices to shoot up at a very rapid rate. This rapid rise in Sydney house prices has also been caused by few homes in Australia that only leave the cashed-up foreign investors with the opportunity to purchase those that are available. This situation creates a big problem to first home buyers who do not have as much money to purchase such expensive houses.

Table of Contents

Executive Summary

Table of Contents

Introduction

Sydney house prices

The key stakeholders that are impacted by the rise in Sydney house prices

Economic theories

Other relevant issues in the article

Conclusion

References

Appendices

Introduction

Since 1983, house prices in Sydney have been increasing and this trend has been constant for over thirty years. The rapid rise in Sydney house prices is contributed by an increase in house demand by foreign buyers, as well as the low supply of houses in Australia. The purpose of this report is to present the causes and impacts of the rapid rise in Sydney house prices, and to provide possible solutions to the problem. The report begins by analyzing the present situation in Sydney as far as house prices are concerned, including major contributors and possible impacts. This is followed by description of the stakeholders that may be impacted by the rise in Sydney house prices. The report also explains the present problem in Sydney in terms of economic theory and concepts of demand and supply. The last section of the report focuses on possible solutions to the rapid rise in Sydney house prices.

Sydney house prices

Sydney house prices have rapidly increased over the recent past. Home buyers increasingly move to Australia to look for new homes for residential purposes and for investment. The rapid increase in prices is attributed to an increase in demand for Australian real estate from foreign buyers that have resulted into several bidders quoting very huge prices (Macken 2014). Home owners have raised house prices in Sydney because foreign investors, especially from China, increasingly buy local homes. These foreign investors are attracted to Australia by the Australian significant investor visa. The significant investor visa attracts prominent investors and business people to Australia and increase innovation and economic growth (Nicholls and Macken, 2014). Additionally, the Canadian government has cut its Federal Immigrant Investor Program and the recent change in the Canadian Visa scheme is expected to attract even more investors and business people to Sydney (Macken 2014). Australian houses are also expensive because of low supply of the stuff (Nicholls and Macken, 2014). Many Australian families increasingly buy new residential homes resulting into the rapid increase in house prices. This form of demand is driven by education as well as lifestyle. Highly educated people believe that they should stay in executive homes. They are therefore attracted to purchase such homes that are available in Sydney at high prices. Again, many Australian men point out that they want quality lives for their wives and families and since price is equated to quality, they end up buying Sydney houses at high prices which keeps these prices high. Foreign investors from China are likely to keep Sydney house prices high as they move to establish industries in Australia concerning the fact that China has strict policy against pollution (Macken 2014). It is anticipated that a consistent rise in Sydney house prices will soon render new home buyers homeless because they will not be able to cope with the high prices (Johnstone 2014). However, the Reserve Bank brings back hope to such people by stating that Sydney house prices are likely to fall in the near future due to low interest rates that have encouraged Australians to build new homes (Hutchens 2014).

The key stakeholders that are impacted by the rise in Sydney house prices

The rapid rise in Sydney house prices may impact a number of stakeholders including home owners, upgraders, foreign investors, local investors, first home buyers, second home buyers, the society and the Australian government. Home owners will have to increase the quality of their houses and build them in different architectural designs to attract home buyers. In addition, the rapid increase in Sydney house prices will compel home owners to consider building varieties of executive houses suited for investment and residential purposes (Macken 2014). As more and more foreign investors come to Australia, the upgraders will want to sell off their present houses in order to build new ones that will meet the current demands of families and businesses (Nicholls and Macken, 2014). Foreign investors are likely to be impacted by the rapid rise in Sydney house prices as they will be compelled to dig deep into their pockets and give out the required amounts before they can be allowed house ownership. Like the foreign investors, local investors will also have to pay for the houses as per the prevailing market price. Unfortunately, some local investors might not afford to pay these prices, leading to market domination by the foreign investors (Macken 2014). First home buyers are those individuals who are purchasing homes for the first time. This group of customers lacks home purchasing experience and they may not have as much money to pay for the expensive houses. Eventually, they might soon become homeless if the current situation persists. Second home buyers on the other hand have bought homes before and can easily adapt to the rapid rise in Sydney house prices. They would thus have an advantage of house ownership at the prevailing prices as opposed to first home buyers (Johnstone 2014). With many foreign investors acquiring new residences in Australia as a result of rapid rise in house prices, the Australian population will obviously increase. Increase in population is associated with environmental pollution and scarcity of resources. The Australian government must therefore make a change in its policy to ensure that these foreign investors are peacefully accommodated in the country. Even though all these groups will be impacted by the rapid rise in Sydney house prices, the first home buyers will be impacted the most because they will not be able to purchase new houses if the house prices increase further (Johnstone 2014).

Economic theories

The two main factors causing the rapid rise in Sydney house prices are; increase in demand of houses from foreign buyers and low supply of homes. According to the law of demand, the quantity of commodity demanded decreases with increase in price and vice versa, all other factors remaining constant. This can be plotted graphically in form of a demand curve showing the relationship between price and quantity demanded of a product (Sakovics and Steiner, 2012). Supply curve is a graphical representation of the quantity of goods that suppliers are willing to bring to the market at the prevailing market prices, with all other factors remaining constant. The point of intersection of demand and supply curves is the equilibrium price and quantity (Liu and Agbola, 2014). All these three relationships are shown in figure 1. Other factors such as changes in consumer tastes and preferences can cause a shift in demand curve thereby changing the price of a particular commodity (Liu and Agbola, 2014). From the media report, an increase in demand for executive houses is Sydney is derived from the increase in number of foreign investors, education and lifestyle (Macken 2014). These factors cause a positive shift in the demand curve where the demand curve shifts to the right (Liu and Agbola, 2014). This shift generally causes an increase in house prices as presented in figure 2 in the appendices section. At the same time, there is low supply of houses in Sydney causing the rise in house prices (Nicholls and Macken, 2014). This causes the supply curve to shift to the left as shown in figure 3. These shifts in demand and supply curves contribute to the high house prices in Sydney.

Other relevant issues in the article

The fact that first home buyers are the stakeholders that are likely to be impacted the most with the rapid rise in prices of Sydney houses, I would ensure that they are not disadvantaged through abolishment of stamp duty for first home buyers and reintroduction of first home buyers incentives for houses. This will give first home buyers the opportunity to meet the expenses of purchasing new homes. In addition, I would encourage first home buyers to form partnerships and share mortgage costs. This is cheaper because those involved in the partnerships can formulate policies that govern their practice. They can also extend these houses and lease the extra portions to others who will in the process assist them in meeting costs (Johnstone 2014). Other alternate actions that can be taken to solve the economic problem in Sydney include building of more homes to increase their availability to foreign investors and Australian residents. Building more homes will mean an increase in supply of homes (Hutchens 2014). This will cause the supply curve to shift to the right thereby lowering the house prices as shown in figure 4.

Conclusion

In conclusion, both local and foreign home buyers in Sydney are faced with the challenge of rapidly rising house prices. The current trend observed in Sydney house prices occurs as result of scarcity of houses and the increasing demand from foreign buyers. If these prices continue to rise over the coming years, first home buyers will be rendered homeless as they will not be able to afford houses in Sydney. The increase in demand as well as low supply of houses cause a shift in the demand and supply curves respectively, which causes prices to rise. First home owners can acquire houses at the prevailing prices through formation of partnerships. Additionally, they can be assisted to fit in the current market through reintroduction of first home buyers’ incentives for houses. Consequently, building more homes in Sydney will increase the supply of houses and house prices will come down.

References

Hutchens, G 2014, ‘House Prices Can Fall Too, Warns Reserve Bank Governor Glenn Stevens,’ The Sydney Morning Gerald, March 8, also available from http://www.smh.com.au/national/house-prices-can-fall-too-warns-reserve-bank-governor-glenn-stevens-20140307-34cr5.html

Johnstone, T 2014, ‘No Joy For First Timers at Auction: Upgraders Win in Lilyfield as Sydney Records Another Strong Clearance Rate of 82.5 %’, The Sydney Morning Gerald, March 8, also available from http://smh.domain.com.au/real-estate-news/no-joy-for-first-timers-at-auction-20140308-34dud.html

Liu, WS & Agbola, FW 2014, ‘Regional Analysis of the Impact of Inward Foreign Investment on Economic Growth in the Chinese Electronic Industry,’ Applied Economics, Vol. 1, no. 26, pp. 2576-2592.

Macken, L 2014, ‘Property: Sydney Expected to Gain Foreign Buyers as Canada Closes Visa Scheme,’ The Sydney Morning Gerald, March 8, also available from http://smh.domain.com.au/real-estate-news/property-sydney-expected-to-gain-foreign-buyers-as-canada-closes-visa-scheme-20140307-34cr6.html

Nicholls, S & Macken, L 2014, ‘Upgraders Keep Sydney Property Market Bouyant,’ The Sydney Morning Gerald, March 8, also available from http://smh.domain.com.au/real-estate-news/upgraders-keep-sydney-property-market-buoyant-20140314-34rqe.html

Sakovics, J & Steiner J 2012, ‘Who Matters in Coordinating Problems? American Economic Review, Vol. 102, no. 7, pp. 3439-3461.

Appendices

Figure 1: Demand and Supply curve showing market equilibrium

Price

S

PEMarket Equilibrium

D

QE Quantity

S– Supply curve PE– Equilibrium price

D-Demand curve QE– Equilibrium quantity

Figure 2- An increase in demand for houses raises the price of Sydney houses

Price

Supply

P1

P0

D1

D0

Q0 Q1 Quantity

Figure 3: A decrease in supply of houses raises the price

PriceS1

S0

P1

P0

Demand

Q1 Q0 Quantity

Figure 4: An increase in supply by building more houses lowers the price

PriceS0

S1

P0

P1

Demand

Q0 Q1 Quantity

1