Example Of Essay On The Name Of Your University

Type of paper: Essay

Topic: Homelessness, Housing, Market, Australia, Taxes, Politics, Housing Market, Business

Pages: 10

Words: 2750

Published: 2023/04/10

Q1
The Australian Housing Market Report, prepared for National Australia Bank Ltd. by RP Data in November 2014, delineates the core changes that occur in the Australian housing market. Nowadays, many economists argue whether or not there is a housing bubble on the Australian housing market, because some features of it let them assume that these market conditions are quite similar to those that existed prior to the collapse of housing markets in other counties (Mercer, 2014). Such market failures, or so-called price corrections, can bear great risks for state stability and welfare due to the strong social impact of housing market. On the other hand, the high housing prices now observed in Australia also lead to the lack of house affordability. That`s why the understanding of this report`s statistics is vital for the proper analysis of the Australian housing market.
Moreover, it can be said that after the end of the financial crisis in 2008, these two cities mentioned above were the permanent leaders in home value growth. Comparing the indicators of the year of 2008, when the home values were in the lowest point, and today`s figures, we can see the growth of Sydney`s and Melbourne`s home values by 51.2% and 46.0% accordingly. Despite the significant results performed by Sydney and Melbourne, other capital cities were not successful in reaching high rates of home value growth.
The next part of the report provides the major statistics on the number of transactions taking place on the Australian housing market. Thus, the total amount of house and unit sales in Australia constituted more than 487 thousand from July 2013 to July 2014. This indicator is also higher by 9.8% than it was in the previous year. Of course, if we look at number of sales in individual capital cities we will receive the similar situation that we have already observed in home value growth, i.e. Melbourne and Sydney will be our definite leaders. The simplest explanation for it is that a lot of people live in these two cities, but what is more important, Sydney and Melbourne are the most attracting capital cities for immigrants and investors who are ready to spend their money on property purchasing. Annual change in home sales vary in different capital cities, but the drastic increases of home sales in Brisbane and Hobart should be noted. The rising transaction activity in these cities can lead to the capital growth of property in the near future.
The next part of the report focuses upon the rental rates. Their growth is much lower than the home value growth, i.e. only 1.9% increase for houses and 3.0% increase for units. The growth speed in rental rates has slowed in recent year, and now its indicator is even lower than the five-year average growth rate of 3.9%. The possible reason lying behind it is the absence of rental pressure that, in theory, can push the rental rates higher. Of course, this can also be caused by the negative gearing often employed by investors to cut their taxes, or by the construction that contributes to the overall size of housing market.
The slowdown of rental growth leads to the softening of rental yields. For example, the gross rental yield for a capital city house has fallen by 0.3% over the past 12 months, and the same indicator for capital city units has become lower by 0.2%. According to the report, the expectations are quite pessimistic, and rental yields will continue to diminish. Analyzing the rental yields in individual capital cities, we can see that the lowest yields were recorded in Melbourne and Sydney, whereas Darwin and Hobart had the highest rental yields.
The last part of the report concerns the issue of investment in the Australian housing market. The housing finance commitments have increased by $2.4 billion over the twelve months, and now the investors` percentage in the overall housing finance commitments constitute 39.0%. Other lending segments have lagged behind. Most of the commitments were done in New South Wales, Victoria and Queensland.
Q2
First of all, let`s give a brief description of the Melbourne housing market. Over the last two years Melbourne has seen one of the most significant increases in home values amongst the Australian capital cities that constituted approximately 18.5%. As we have already mentioned above, the Melbourne’s home values growth rate was the second in the country, lagging only behind Sydney. The overall rolling annual change in Melbourne`s home values is depicted in figure 1.
Figure 1. Rolling annual change in Melbourne and combined capital city home values (Reserve Bank of Australia, 2015)
Now it`s time for us to answer the question whether or not the prices are overheated here. It`s necessary to define the meaning of “overheating” in order to conduct our analysis. Generally, this term is usually used to describe the situation when the aggregate demand is increasing so dramatically that the productive capacities of the economy are not sufficient enough to meet the demand. The overheating occurs when you pay too much money for few products. So, that`s why we should determine why the prices in this market have driven up, because we have to understand whether their increase is based upon some fundamental reasons, or maybe, the assets are simply overvalued, leading to the establishment of higher prices.
There are four major reasons for the growth of prices. Firstly, the annual population growth in Australia is higher than the world`s average. Moreover, Melbourne has always attracted immigrants to come to this city, that`s why the net migration to this city is one of the biggest amongst capital cities (Linderman, 2011). Such population growth leads to the increase in housing demand. Foreign investors also come to this city in order to purchase property, so they add to the housing demand. Another reason is that since 1996 the interest rates in Australia have constantly decreased, allowing people to get cheaper mortgages, thus, the demand has been increasing (see figure 2 for interest rate dynamics). The number of factors can explain the cut of interest rates, but the major one is that the Australian economy is strong and efficient one.
Figure 2. Interest rate dynamics in Australia, percent. The figure is taken from the Reserve bank of Australia
Thirdly, the tax and other policies have contributed to the creation of housing undersupply, especially in land sphere. In addition, we should mention that the foreign investors play one of the leading roles in the reduction of this undersupply, because they allocate large resources to the construction field, that in turn, leads to the growth of housing stock. Some people argue that actions of foreign investors have influenced the housing prices, because they can pay more money for the Australian property (Law, 2013). On the other hand, if we analyze the core interest of such investors, we will see that they prefer buying property in the high-end of the housing market and the cost of such property is much higher than the median price. That`s why I disagree that foreign investors contribute to the higher housing prices, and I think that they play the positive role.
Therefore, we have listed the major reasons why the housing prices are so high. I think that these prices are increasing because of demand-supply gap and the cheap crediting due to low interest rates. The annual population growth and general economic development of the country cannot fully explain the rise of prices. That`s why we can conclude that the housing prices are overheated in Melbourne.
Q3
a) Let`s imagine the situation that the government has decided to introduce the buyer`s tax. The impact of that decision can be illustrated in the following way (see figure 3 for the buyer`s tax impact).
Figure 3. Impact of the Buyer`s Tax on Social Welfare (Total Surplus)
The buyer`s tax will shift the demand curve D (blue) to the left by the amount of the tax payment. The new demand curve (red) crosses the supply curve (green) in the point that is below the previous equilibrium. Before the introduction of the buyer`s tax, consumers bought goods at Q* quantity and P* price. However, now when price is higher due to the tax (we should note that the new price lies between the previous price and the previous price plus tax payment), consumers are ready to buy only QT quantity of goods that is lower than the equilibrium quantity. That results in the decrease of consumer and producer surpluses. Previously, the consumer surplus equaled the square of triangle formed by the horizontal line of equilibrium price and the demand curve, while the producer surplus was the square of triangle formed by the supply curve and horizontal line of equilibrium price. Now, when the buyer`s tax is in force, the consumer surplus decreases by the square of yellow rectangle and upper red triangle, whereas the produce surplus decreases by the square of blue rectangle and lower red triangle. The blue and yellow rectangles depict the government tax revenues, while the red zone shows the deadweight losses due to the introduction of tax. We can summarize that the new price will be higher than the previous equilibrium one, the producer and consumer surpluses will decrease, thus the social welfare will fall as well.
b) We have already discovered that the consumer and producer surpluses decrease due to the buyer`s tax, leading to the fall of total surplus. Of course, if we increase the buyer`s tax, the decrease in surpluses will be even more gradual. Therefore, the fall of total surplus can be more drastic. What is more, the deadweight losses will also increase. As we know, the total surplus represents the social welfare, so we can conclude that the increase in the buyer`s tax cannot raise social welfare.
c) We have emphasized in part a) of this question that the yellow and blue rectangles in figure 3 represent the government tax revenue. If we increase the buyer`s tax, it`s quite reasonable to assume that the government revenues will increase as well. The amount of tax revenues can be simply calculated by multiplying the new quantity of sold goods and the tax payment (QT × T). However, the extent of this increase will largely depend on the elasticity of demand and supply curves.
Q4
The monopoly describes the situation when there is only one producer with market power in its hands. The market power is the ability to influence the market prices, i.e. to establish them without the fear of losing all its customers. The figure 4 illustrates the monopolized market. In our case, the government acts as a monopolist. Let`s give answers to the listed questions.
Figure 4. Monopolized Market
a) If the government objective is to maximize profits, it will employ the basic principle of profit maximization that is appropriate for any firm in any market conditions. It means that government should choose such quantity of units that its marginal revenues MR would equal its marginal costs MC. The figure 4b illustrates the revenue and profit curves. We see that profit is maximized when our monopolist’s quantity is 6 units. If we go back to figure 4a we will see that at this quantity level our marginal revenues equal our marginal costs. Then the monopolist sets the price in accordance to the determined quantity. In our case, the profit is maximized, if government sells 6 units per day, asking $18 per each unit. Thus, its profit will be $60 (a pink rectangle with height of $8 and width of 6 units).
b) If the government objective is to maximize revenues, the quantity of units will be another. Let`s look at figure 4b one more time in order to analyze the revenue curve. The revenues reach the peak when the monopolist sells 12 units per day. The upper figure shows that the peak of revenue curve corresponds to the point where our marginal revenues equal zero (MR=0). This is the basic rule for revenue maximization. Therefore, if the government sells 12 units per day, asking $12 per each unit, it will maximize its revenues, i.e. its revenues will constitute $144.
c) Of course, we should realize that the existence of monopoly leads to the deadweight losses, because the monopolist can produce lower quantity of units and sell them in higher price. Nevertheless, it doesn`t mean that we cannot maintain the maximum welfare as in perfect market conditions. We know that the social welfare, i.e. total surplus, maximizes when price P equals marginal costs. The monopolists sets its price above its marginal costs, because he follows the rule of profit maximization and it doesn`t care about the social welfare. On the other hand, if the government is the monopolist, it can follow another purposes, that`s why it can refuse to employ the profit maximization rule. Our government objective can be to maximize welfare, that`s why it will establish price equal to its marginal costs (P=MC). Point ec in figure 5 shows where marginal costs curve crosses the demand curve. Thus, our monopolist will act as in the real perfect market conditions, so there won`t be any deadweight losses. The darkened area shows the total surplus that is maximized.
Figure 5. Social Welfare under Monopoly
Q5
The major question that arises during this research is how to regulate the housing market. There are various practices employed by different countries. Of course, the government housing policy covers many aspects of housing market, e.g. public and social housing, rental housing, housing allowances, rent and eviction control, homeownership subsidies etc. We have previously established that one of the core problems of the Australian housing market is low affordability of housing caused by high prices. That`s why we should take a look at other countries` policies in order to see how to make housing more affordable for the Australians.
The first country that can be useful for our analysis is the USA. It is known that eight years ago there was the subprime mortgage crisis in this country. Today a lot of discussion is held about its core reasons, but the definite statement hasn`t been formed yet. I believe that one of the drivers of this crisis was the Community Reinvestment Act (CRA), adopted in 1977. After its introduction banks started to originate riskier loans to uncreditworthy consumers. Moreover, the Gramm-Leach-Bliley Act contributed to the nearly uncontrolled crediting that resulted in housing market collapse. This is only one of the explanations of that crisis, but I consider it the true one. One of the US regulatory responses was to improve the regulation of lending practice. I think that the Australian government should pay attention to this story, because low interest rates also create a good climate for uncontrolled lending. Nevertheless, it doesn`t mean that the government should raise the interest rates, because it will be harmful for economy.
The second advice is based upon the Austrian experience. As we know, there is a gap between the housing supply and demand that is currently reducing. However, the housing supply for low- and medium- income citizens remain quite low, that`s why we should encourage the supply side of the housing market. Austria has so-called “limited profit companies” that receive strong and continuous support for supply-side subsidies. Moreover, it conducts facilitative land policy, thus reducing the construction costs. Therefore, the Austrian housing market is quite stable and there are only modest house price rises. So, I advice the Melbourne authorities to provide support for low- and medium- income housing supply and to reduce the land constraints used in Melbourne. This can possibly lead to the decrease in supply-demand gap and the fall of prices.
And the last example is Germany. I think that this country has one of the best regulatory framework of rental market. Particularly, the Law for the Protection of Tenants from the Arbitrary Eviction is employed to govern the rental contracts. This law provides guarantees for tenants and landlords, thus strengthening trust among them. Of course, it leads to the increase in rental market. Today`s Australian rental market regulation is not bad, but I think that its improvement can boost the efficiency of this market.
Overall, we have analyzed the Australian housing market and revealed its core problems. In addition, we have provided certain advice aimed at the improvement of housing affordability. Of course, there are even more ways to regulate the housing market in a proper manner, but I believe that the advice listed here may be of the particular use for the Melbourne authorities.

Reference List

Law J., 2013. Housing affordability: Are foreign investors to blame for Australia`s high property prices? News.com.au, [online] Available at:< http://www.news.com.au/finance/real-estate/buying/housing-affordability-are-foreign-investors-to-blame-for-australias-high-property-prices/news-story/710ba2cff1932f0fb3f81ce83a07946b> [Accessed 4 January 2016].
Linderman, J., 2011. Mastering the Australian housing market. Melbourne: Wrightbooks. Available at: < http://samples.sainsburysebooks.co.uk/9781742468532_sample_421908.pdf> [Accessed 4 January 2016].
Mercer P., 2014. High Australian real estate prices lead to bubble fears. BBC, [online] Available at: < http://www.bbc.com/news/world-australia-29639891> [Accessed 5 January 2016].
Reserve Bank of Australia, 2015. Cash Rate Statistics. [online]. Sydney. Available at: <http://www.rba.gov.au/statistics/cash-rate/> [Accessed 4 January 2016].
RP Data, 2014, Australian Housing Market Report 2014, prepared for National Australia Bank Ltd. [online]. Available at: <http://peergroup.com.au/wp-content/uploads/NAB-Australian-Housing-Market-Report.pdf> [Accessed 4 January 2016].

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