Demand and Supply of Homes Free Samples for Students-Myassignment

Question: Discuss about the Demand and Supply of Homes in Major Australian Cities. Answer: Introduction The article Housing affordability looks set to worsen by David Scutt on 1st February 2017 presents the condition of real estate market among major towns in Australia. The house prices in Australian capital city increased by the highest level in 2016 since the year 2009. The prices grew by 13.7% and 15.5% in Melbourne and Sydney respectively. The rising prices in these cities are attributed to the limited supply of houses and increase in the demand which has resulted in affordability crisis. The demand for homes has been fueled by the cut in interest rates in May and August 2016 as well as increased in investor lending. It is believed that the prices of houses will continue to rise in 2017, but the situation is expected to cool down in coming years. This assumption is based on the fact that new houses are under construction in Melbourne and Sydney(Scutt, 2017). On the demand side, with no possibility of cuts in interests and modest growth in household income and weak wages will help p ut the demand on the check. The issue of housing affordability is not only of concern to the government but also to economists in various institutions like the Commonwealth Bank. The government has a significant role in controlling demand side factors such as reducing immigration levels as well as limiting foreign and investor demand for houses. Housing affordability will be enhanced by progressive reforms to stabilize demand and supply. Economic Analysis Demand for Houses The demand for houses in the major cities in Australia is affected by several factors. Foremost, there is the issue of population pressure. Cities especially Sydney and Melbourne have experience population increase in the recent years. With a high number of people in the cities, the demand for accommodation has increased significantly pushing up the prices. Investor activity is another factor that has increased pressure on houses. Both local and foreign investors are purchasing the homes, not for use, but they hold them in anticipation of price increase to get capital gains when they resale on higher prices(Lindeman, 2011). In 2016 May and August, the interest rates were slashed a situation that encouraged many individuals to take loans to buy houses due to the low cost of borrowing. Moreover, the tax concession on housing provided by the government has also been a significant factor in pushing up the investor demand for houses and hence an increase in the price. The tax concessions together with the low cost of borrowing are contributing to speculative demand from the investors. Before a shift in the demand, the equilibrium in the market is attained at point A where the equilibrium price is Pe while the quantity is Qe housing units. However, the rise in demand caused by the factors mentioned above makes the demand curve to shift from D1 to D2. The equilibrium point changes to B with an increase in the price of homes from Pe to P1. Likewise, the number of houses demanded increases to Q1. Supply of Houses As the demand for houses has been increasing, the supply has been unable to respond to the rising demand. Various factors hinder the delivery of new dwelling units in Australia. Firstly, the planning process of constructing houses is said to be too complex. It takes a long time for the parties to settle development approvals. In the recent decades, Infrastructure provision such as water, roads, energy, and sewerage has been shifted to the developers. This move has increased the cost of construction, and the developers often pass the costs to the buyers(Khezr, 2015). The land restrictions policies in Australia also increases the costs of compliance and hence a discouragement to the developers. Additionally, insufficient finances hinder the ability of the developers to deliver additional homes(Haslam McKenzie Rowley, 2013). Due to these constraints, there is a shortage of dwellings in the market. On the diagram below, the number of houses demanded by the consumers is Q2 while the deve lopers can only supply Qe. Hence the difference between Q2 and Qe represents a shortage in the market. The price elasticity of demand for dwellings in Australia is inelastic. Homes are essential for the individuals. For example, if a person works within Sydney he or she must find a home in this town near a place of work. Even if the price increases, the person will still have to buy a house. Additionally, the substitute for homes is the rented houses. The rents in Sydney are also high, and most of them are not in good condition, and yet the private landlords keep on increasing the prices(Yates Berry, 2011). The best alternative for most persons is buying the house regardless of the price and hence price inelasticity of demand. Therefore, it is evident that the affordability of homes in the main cities in Australia will not change soon if the government fails to intervene. The most important step the government should take is to ensure the equitable and sufficient provision of the infrastructure. The cost of developing important infrastructures such as roads, water, energy, and sewerage contributes significantly to the higher prices of homes(Rahman, 2010). In the regions where the government does not deliver the required infrastructure, then the property developers will make the purchasers of home bear the costs. Better infrastructure will increase the availability of strategically located land for construction of new homes. The government should provide sufficient support to the charities and other parties involved in the construction of affordable houses to increase the supply. Moreover, there is a need to relax stringent land use policies and ease access to funds for construction of residential units. Conclusion Australian major cities have been hit by housing affordability crisis in the recent years. The prices are high thus hindering the low-income individuals to access affordable dwelling units. If this trend continues, most of the public sector workers will find it difficult to stay at their workplace while others forced to reside in substandard dwellings. This situation depicts that houses are essentials for Australians and governmental intervention to restore the anomalies is highly desirable. It is important for the state to give emphasis on increasing the supply of affordable apartments. Favorable land use policies, adequate financing, and development of core infrastructures will boost the provision of new dwellings, and hence affordability will be improved. Bibliography Haslam McKenzie, F. M., Rowley, S. (2013). Housing Market Failure in a Booming Economy. Housing Studies , 373-388. Khezr, P. (2015). Time on the market and price change: the case of Sydney housing market. Applied Economics , 485-498. Lindeman, J. (2011). Mastering the Australian housing market. Richmond, Vic: Wiley. Rahman, M. M. (2010). The Australian housing market - understanding the causes and effects of rising prices. Policy Studies , 577-590. Scutt, D. (2017, Feb 1st). CBA: Housing affordability looks set to worsen. Retrieved April 26th, 2017, from Business Insinder, Australia: https://www.businessinsider.com.au/cba-australian-housing-affordability-looks-set-to-worsen-2017-1 Yates, J., Berry, M. (2011). Housing and Mortgage Markets in Turbulent Times: Is Australia Different? . Housing Studies , 1133-1156.