Demand and Supply of Housing in Australia

Economic Policy Problem: Demand and Supply The demand and supply of Housing and the Housing affordability in Australia I. Introduction Like all other economies The Australian economy has been affected by the global financial crisis which is now a global economic crisis due the collapse of Lehman Brothers and other financial institutions in US. The consequences of the global economic crisis has been severe and as a result of this the world is in Recession therefore many economies has pushed the budget into a deficit launching economic package trying to boost their economies.

Because the housing market and the housing industry is one of the most important sector of the economy this report aim to analyse how the global financial crisis has affected the demand and supply of housing in Australia also what are the condition of housing affordability and how the Government through the stimulus package tend to intervene the economy.

After this report we will be able to understand the movement and the reason for a movement into the demand and supply curve for housing in Australia you will be able also to identify if the Government economic policy is going for the correct pathway or if this temporary measure will not bring certainty and confident to the economy. It is very clear that at least the Rudd’s Government is addressing the problem anticipating future scenarios and acting to correct this scenarios exploiting and taking advantage of the relative good shape of the Australian economy in this moment in comparison with another countries.

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II. Australian Economy Like all other economies the Australian economy was very much affected by the global economic crisis and the recession around the world therefore the financial institutions started to feel the pressure and the stress of the situation but the Australian Government put in place measures to guarantee the debts of banks. Apart of that the Australian economy was affected by the collapse of commodity prices this brought real losses of income to the economy which put to business in a position to review their investment plan in the future.

At the same time households have become more cautious about expenditure due the increase of the unemployment rates and they start to increasing savings. Because the panic caused and the lack of consuming the RBA responded lowering of interest rates reducing from 7 ? per cent to 3 ? per cent, this reduction have fully passed to the borrowers therefore interest rates on housing loans have fallen as well as interest in consumer and business loan, this rate are at historically low levels.

This has produced an increase in loan demand; other factor that increased the demand of loans apart of the lowest interest rate around 5 ? per cent is the program first home owner grant which has attracted new buyers into the market. On top of that the stimulus package is an initiative of the government to support spending but this measure cost that last financial year there was fiscal surplus of 1 ? per cent of the GPD even so Australia will remain as one of the better performing economies around the world.

One of the reason of the reduction in wealth over the past year is that people which income have grown over the year overestimated the returns of the share market, people did not set up realistic expectations about their financial goals and now they have to increase the proportion of income working additional year or many of them returning to the workforce to compensated the losses of the share market due the global financial crisis, people did not took in count that share market produce negative returns every few years therefore they should have included this into the returns expectations.

Although the large fall in wealth the households sector still is in a relative good position because people is maintaining a good balance between assets and liability and even when the hose market was subdued during 2008 and the prices has fallen by 3 per cent, the Australian overall the housing market has held up pretty well in comparison with another countries like US or UK where price has fallen by 20 per cent. An update on the economy and financial Developments (Battellino, 2009) III. Supply and Demand

The relatively high level of housing price in Australia is a reflection of a collective decisions of households, this is not the result of a external forces they are at their income, preferences, access to finance have been willing to pay those prices. But this is not the only reason the supply – side factors also influenced in the fact of high price like the ability to built new housing on the city fringe, factor affecting the ability to increase supply closer to the city, transport infrastructure and community affect the feasibility and desirability of living in a different place.

One of the good indicators of some of the supply issue is the cost of raw land. Prices still are high on the edges of Sydney but lowest on Melbourne and Adelaide therefore will very important to see if it is possible to reduce these prices or at least try to keep a lid on increase over the years because the housing affordability over the medium term will be the result of the ability to expand the supply of housing.

Home building has recently been at low levels and this is because in a showing or uncertainty situation economy builder does not want to take higher risk than usual and also recent weakness in building approvals are affecting the supply curve and when there is a lack of supply and increase in demand the prices will go upwards. Conditions and Prospects in the Housing Sector (Richards, 2009)

Looking beyond that the fall in interest rate and improvements in housing affordability should contribute to growth this has not happened but economist are expecting that occurred during this year and gradually boost home-building. Another factor that can contribute the building approval for building activities and therefore increase the supply of housing is the increase of number of first – home buyer demand there has been an important increase in loans approval in recent months.

Is also very important understand that for many economist in this moment there is undersupply in the housing market even though we do not know exactly how large the undersupply it is but this should support also home-building. According with the current population rates, the decline in average household and level of demand for second house had been maintained most calculation now put “underlying demand” around 180. 000 to 200. 000 per year that means we need to increase the number of new house built than has actually occurred.

However, we can ignore the impact of prices on the demand for housing remember over the years the cost of housing has grown faster than incomes and the cost of goods and services as a consequence of that the demand for housing will be affected by the higher cost of housing therefore we can expect that the demand decline because many young adult will choose to live with their parents for longer, many other would prefer extra flatmate rather than having a bedroom vacant and another owner of holidays homes very likely to sell them so perhaps this is the reason that we have built fewer homes in recent years than might have been expected.

But the undersupply of housing is a story of never ending because there is an Intelligent Housing Research Group “Hometrack” stated that the calculation of the RBA are based in accurate data according with them Australia may already have an excess of housing according with their estimation there are at least 10 millions dwellings in Australia compared with the 8. 3 millions of ABS data showing occupied dwellings of 8. millions, the extra two millions are housing awaiting to be sale or development, second homes and abandoned homes. Therefore they say that the ABS Method for calculation the ratio of people per dwelling per dwelling is based on ABS census data which is based upon occupied dwelling however Hometrack analysis is based on postal address indicates that Australia’s current level of housing relative to its population is in line with other Anglo economies.

Following this looking at the context of population growth Australia total building approvals have running about the demand, for that reason the concern is that business and government decision in regards of housing market are being made based on demand assumptions that vary from the actual behaviour of the housing market. But how can we know who is telling the true well according with statistics during 1985-2009 an average of 1 residential dwelling was built per 1. 75 new Australian and only in the last 3 months has the rate of new building fallen behind population growth.

This is in excess of the current ABS ratio of 2. 55 person per occupied therefore far from having and undersupply of housing Australia may well have substantial oversupply, it’s just that no-one is living in many of them. Is very likely cause of this large stock of unoccupied homes is Australia system of negative gearing. Most investor prefer build houses but avoid the renting-damage property having to manage tenant therefore they built it for capital gains because is better to keep the hose out of the rental market and claim the loss against tax.

In order to defend the dominant view that Australian house price are justified by supply and demand, Anthony Richards (Economist) observed that the relative high level of housing price in Australia is a reflection of demand and the collective decision of households therefore housing price have not been set by external forces they are at this level because buyers in general have been willing to pay the prices. This is a fairly typical piece of neoclassical economic thinking “Prices reflect the interaction of supply and demand and are therefore justified”.

Economist who apply a standard “Supply and demand” mindset to analysing the property market seem to consider that demand can shift “Left and right” as the number of buyers falls and rises with time; but they seem to ignore that the demand curve can shift up and down as well. Is response to the willingness of lenders to increase or decrease their loan to valuation ratios and if there is a substantial fall in LVR to new buyers could reduce the price that would be buyers can offer even in shortage of properties.

Price S D3 D2 D1 Quantity of Supply, Demand Increase of demand due to: • Population Growth • Low interest Rates • Booming economy with rising wages • Governments Policies like Cuts to capital gains taxes Lies, damned lies, and Housing statistics (Keen, 2009) Bentick, Teresita, (2003) Microeconomics Study guide (4th Ed). Australia: Pearson Educations Australia. Frank, Robert, Bernanke Ben, (2001) Principles of Microeconomics (1st Ed).

New York, USA: McGraw Hill Higher Education IV. Housing Affordability. Housing affordability can be divided in two: people need where to live whether they buy or rent therefore we need to include rents as well as mortgage to measure housing affordability, the second part is people who are looking to get into the housing market and people who already are already there. Housing affordability is consider as spending up to 30% a household’s income on mortgage repayments or rent.

In the past two decades the prices of the housing has risen matched by a decrease in housing affordability this mean that a household now need 34. 8% of their income to meet an average loan repayment. According with a report released entitled “Anatomy of Australian Mortgage Stress” released by fujitsu consulting in April found that the main cause of mortgage stress is the interest rate rises and rents have risen slower than mortgage repayments pushing people out the house market and into the rental market, this mean that rents too are on the rise.

According with report released by The Real State Institute of Australia REIA on April 22th 2009 “An opportune time for renters to buy” the ABS released the Consumer Price Index (CPI) showing that housing components increased 0,9% for the quarter bringing the annual increase to 5. 5%. The majority of this increase in the housing components was driven by rents which increased by 1. 7% over the quarter and 8. 4% over the year, this ncrease in rents reflects record low vacancy rates and the unavailability of rental properties in all capital cities. Building approvals and housing finance for investment purposes continue decrease during the March quarter 2009 and is very likely to put further upwards pressure on rents. Australia will need to build significantly more house than has occurred recently to meet rental demand. Housing affordability has improved significantly since the reserve bank began cutting interest rates in September 2008.

With the availability of the first home owners boost (FHOB), lower interest rate, greater affordability and vacancy rates remaining in a low record now would be an opportune time for these in the rental market to consider the purchase of their own home. Real Estate institute of Australia (2009, April 22). Ann opportune time for renters to buy. Retrieved April 28, 2009, from http://www. reia. com. au/media/documents/REIA_MediaRelease_AnOpportuneTimeforRenterstoBuy. pdf Housing costs and Affordability in Australia (Thrift, 2008) Conclusion

Is very clear that the housing sector in Australia is showing signs of improvements due the increase in households cash flows as a result of the of the important role of the Government and the RBA in the downturn of the economy decreasing the interest rates and providing policies that improve housing affordability for people to repay the loans but in order to tackle this important problem is very important that the government does not exclude anyone from the spectrum like young people also is very important that the Reserve Bank of Australia as a Central bank play an important role n this matter acting more like an honest broker developing real strong statistic about the housing market that helps in a future time to provide valuable resources, accurate data and support important decisions about the supply and demand of housing market instead of take part of this problem assuming neoclassical position taking in consideration on side of the problem and ignoring the other.

REFERENCE LIST ? Bentick, T. (2003). Microeconomics Study Guide. Pearson education Australia, Australia: Pearson Education Australia Frank, R. , Bernanke B. (2001) Principles of microeconomics. Mc graw Hill, New York: Gary Burke ? Thrift Rhea, (2008) Housing and Affordability in Australia . Retrieved April 27, 2009, from http://www. rba. gov. au/EconomicsCompetition/2008/Pdf/2008_first_year. pdf ? Real Estate institute of Australia, (2009, April 22). Ann opportune time for renters to buy. Retrieved April 28, 2009, from http://www. reia. com. au/media/documents/REIA_MediaRelease_AnOpportuneTimeforRenterstoBuy. pdf ? Battellino, Ric. 2009, March 31). An Update on the Economy and Financial Developments. Retrieved April 27, 2009, from http://www. rba. gov. au/Speeches/2009/sp_dg_310309. html ? Richards, A. (2009, March 26). Conditions and Prospects in the Housing Sector. Retrieved April 27, 2009, from http://www. rba. gov. au/Speeches/2009/sp_dg_310309. html ? Keen, S. (2009, April 08). Lies, damned lies, and housing statistics. Retrieved April 27, 2009, from http://www. businessspectator. com. au/bs. nsf/Article/Lies-damned-lies-and-housi

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