Demand and Supply in the Australian Market-Samples for Students

Question: Discuss about the Demand and Supply in the Australian Property Market. Answer: Introduction The First Street Home Loans founder and an awarded broker in Australia Jeremy Fisher (2017), published an article in Your Mortgage magazine titled: Strong Demand and Limited Supply Boosting Property Prices. In this article, Fisher refers to a Commonwealth Bank of Australia (CBA) report prepared by Michael Blythe, CBAs Chief Economist. This report notes that whereas there is a high demand for property in Australia, the supply of the same is low and this leads to price hikes. When referring to the Australian Bureau of Statistics (ABS) website, it is notable that residential property price index for all capital cities rose by an average of 2.2% in the first quarter of 2017. Fishers magazine article notes that according to the CBA report, the high property demand is attributed to a number of factors. Wade and Irvine (2017) take note that Australias housing market has recently attracted foreign investors, more so from China. First, it is argued that Australia is experiencing high population growth rates which then translate to an increased number of persons who need houses. These population increases are as a result of increased birth rates and increased immigration rates. Blythe argues that most immigrants are skilled and financially capable of purchasing properties which further increases the demand. Policy makers will benefit from the research results as they will gain insights of the best means to curb the problem. Analysis Various other analysts take cognizance of the state of the current property price index in Australia. Delmendo (2016) notes according to the UBS Global Real Estate Bubble Index, Sydneys housing market is ranked to be among those in the bubble risk. This view is shared by the International Monetary Fund and The Economist who have noted that the Australian housing market risk exist because prices remain overvalued. The question arises therefore whether the bubble in the current Australian housing market will bust. Burnsidey, Eichenbaumz and Rebelox (2015) argue that whereas some booms in prices in the housing market are likely to bust, other do not and generally, it is difficult to find fundamentals to be used in predicting the likelihood of a bust occurring. The image of the graph below shows the percentage increases in the residential property price index for all eight capital cities of the states in the March quarter: Fig: Residential property price index (% change) Source: Abs.gov.au (2017) The graph shows that most of the Australian cities are experiencing a rapid hike in prices. The United States real estate bubble that caused a recession around 2008 was as a result of credit facilities that were made easily available which culminated into a boom and a subsequent bust. The low interest rates as noted by Fishers magazine article therefore brings to the fore the question whether the attendant high demand will cause a boom and a subsequent burst as has been cautioned by the IMF and UBS. Delmendo (2016) further acknowledges that the price surge is as a result of increased immigration, rapid population growth rates and increased foreign investors who purchase over 20% of property annually. Fletcher and Kunzel (2015) noted that some territories recently introduced taxes and adopted strict lending standards to diminish the foreign demand in the future, Australia was able to sail through the 2007-2009 recession due to its lending standards that were strict compared to those of the United States and by a stimulus package for first home owners in some states. Given the current house prices, most states in Australia are ranked as among the most unaffordable housing markets. The explanation for this is that urban consolidation has limited and in some instances prohibited the construction of new houses on the urban fringe. Recommendations In order to prevent and mitigate the effects of a boom-bust cycle, policy reforms must take into consideration the need to achieve low household debts. Policy reforms could be aimed at boosting nominal incomes, reducing interest rates and boosting growth. Further, policy reforms could be adopted to assist household to acquire assets which may be used to offset debts. An example is Netherlands which respectively introduced tax exemptions that facilitated financial support by parents paying their childrens mortgage debts and the United States which allowed early access to pension savings to finance mortgage debts. To avoid a housing crisis, the government should introduce incentives such as gradual reduction of tax on mortgage interests and minimizing rent controls to allow flexibility in lease contracts. Further, measures should be employed to minimize the debt-income ratios which will limit borrowers ability to take larger mortgages likely to strain their ability to pay. On the issue of access to affordable houses in Australia, a few policy recommendations have been fronted while other writers note that the politicians are all talk but no action in implementing policies to make housing affordable. Due to the expected future increase in foreign demand, it is justifiable to induce levies on foreign housing investment as is the case in NSW and Victoria to afford locals an opportunity to acquire homes in the market. Further, it is encouraged that the government should consider implementing a KPMG report that recommended scraping stamp duty and in its place adopting broad-based land tax which will reduce upfront costs and encourage productive land use. Conclusion By this moment, it is unnecessary to reiterate the features of a boom-bust cycle in the housing market. In the housing market, booms are accompanied by such factors as slack lending standards, low interest rates and increased demand. These lead to hikes in prices and increased mortgage debts. A bust happens when indebted households are unable to pay their mortgages and increase consumption which necessitates low house prices and consequently, investments in new houses tumble. In sum, it is noteworthy that the property/housing market is the backbone of the Australian economy and therefore, the federal and state governments main concern should be to avoid a bust. The CBA report attributes the high demand to low interest rates which make the property market an attractive investment option to not only the Australian residents but also to foreign investors. The IMF and UBS have taken note of the risky position of the Australian housing market as a result if the overpricing. One may argue that the supply of houses is not the issue but the demand is outweighing the current supply. For this reason, the policy reforms that will reduce the demand as recommended should be adopted and at the same time, measures should be taken to ensure the supply is not limited Bibliography Abs.gov.au. (2017).Residential Property Price Indexes: Eight Capital Cities, Mar 2017. [Online] Available at: https://www.abs.gov.au/ausstats/abs@.nsf/0/510D8915596EEFE9CA257F1B001B0107?Opendocument [Accessed 16 Aug. 2017]. Burnsidey, C., Eichenbaumz, M. and Rebelox, S. (2015).Understanding Booms and Busts in Housing Markets. [Pdf] Available at: https://www.kellogg.northwestern.edu/faculty/rebelo/htm/Booms-busts.pdf [Accessed 16 Aug. 2017]. Delmendo, L. (2016).Australias housing market weakens. [Online] Global Property Guide. Available at: https://www.globalpropertyguide.com/Pacific/Australia/Price-History [Accessed 16 Aug. 2017]. Fisher, J. (2017).Strong Demand and Limited Supply Boosting Property Prices. [Online] Your Mortgage. Available at: https://www.yourmortgage.com.au/article/strong-demand-and-limited-supply-boosting-property-prices-186699.aspx [Accessed 16 Aug. 2017]. Fletcher, K. and Kunzel, P. (2015).How to prevent housing bubble trouble. [Online] Sslcam.news.com.au. Available at: https://sslcam.news.com.au/cam/authorise?channel=pcurl=http%3a%2f%2fwww.theaustralian.com.au%2fbusiness%2fbusiness-spectator%2fhow-to-prevent-housing-bubble-trouble%2fnews-story%2f1d5a5292f855e2fd46a8d1cd19e9fdfa [Accessed 16 Aug. 2017]. Hartwich, O. (2017).13th Annual Demographia International Demographia International Housing Affordability Survey: 2017. [Online] Available at: https://www.demographia.com/dhi.pdf [Accessed 16 Aug. 2017]. Phibbs, P. (2017).Housing policy is captive to property politics, so dont expect politicians to tackle affordability. [Online] The University of Sydney. Available at: https://sydney.edu.au/news-opinion/news/2016/03/11/housing-policy-is-captive-to-property-politics--so-dont-expect-p.html [Accessed 16 Aug. 2017]. Wade, M. and Irvine, J. (2017).The good, the bad and stamp duty: how to solve Australia's housing crisis. [Online] The Sydney Morning Herald. Available at: https://www.smh.com.au/business/the-economy/the-green-amber-and-red-of-housing-affordability-policies-20170414-gvl9ci.html [Acces