Valuation Metrics Used to Measure the Degree of Expensiveness of Houses
Question:
Discuss about the Analysis Of Australia Property Prices.
In Australia, property prices have become a serious issue for various economists along with policymakers. The country has possessed five biggest cities, which have unaffordable housing markets. This situation has occurred due to huge demand for houses while supply has remained insufficient. In some capital cities of this country, like Sydney and Melbourne, housing prices have increased significantly for the last few years (Hutchens 2018). Hence, to measure the degree of expensiveness of houses, various valuation metrics like price-income ratios and price-to-market rents ratios are used (Miao 2014). This essay has intended to analyze those factors based on some newspaper articles. Moreover, some suggestions are provided to reduce the house prices in these two cities. This essay has also tried to find some causes for which Sydney and Melbourne have high demand for dwelling irrespective of their high price rate. For supporting those arguments, proper evidences are also provided.
According to the Sydney Morning Herald, the second worst position, based on housing market, has possessed by Sydney while Melbourne has possessed the fifth one. The house prices in Sydney have remained almost 13 times higher compare to the median household income. For Melbourne, these prices have remained almost 10 times higher compare to the country’s median income (ABC News. 2018). Hence, to understand these differences more precisely, price-to-income (PTI) ratios can be analyzed for those capital cities of Australia. According to this ratio, the median price related to a property is compared with each city’s median household income. It has been observed that the PTI for Sydney and Melbourne has increased significantly compare to other capital cities of Australia. This ratio for Sydney has stood at 9.5 times more than the median income. For Melbourne, this ratio has remained at 8.7 times more compare to the median household incomes. Moreover, this ratio has remained above 39% for Sydney and for Melbourne it has remained above 30% for the last five years (Scutt 2018). On the other side, the PTI ratio for Perth and Darwin has given a negative value, which implies recession period these cities. In addition to this, the price-to-market ratios (PTR) can be taken as another index of valuation. This ratio is measured by the price of a home with its annual cost for renting. This ratio is also high for Sydney and Melbourne.
Hence, the increasing price of houses can be determined with the help of demand and supply concept. According to the demand law, price of a commodity has a negative relation with its quantity demanded. However, excess demand has led the price of a commodity to increase further. This phenomenon is also applicable for the housing market in Australia. The country has some demand side factors, which have influenced the demand for houses to increase more. The chief factor behind this increasing price of houses is steady population growth due to immigration (Hutchens 2018). In addition this, market stability and interest of foreign buyers have allowed housing prices of these two cities to increase more along with higher rental rates (Valadkhani and Smyth 2017). The government has also played a vital role to influence the housing demand to increase significantly. For instance, it has charged lower interest rate for lending money, which in turn has influenced the demand for houses to increase further. In addition to this, per capital income of Australian people have also increased constantly and this has influenced them to purchase new dwellings.
In this context, it can be mentioned that this increasing trend has occurred due to immigration and this has been represented by the yellow shaded area (theguardian.com 2018). Moreover, the blue shaded are has represented the number of domestic population.
Analysis of Price-to-Income (PTI) Ratios for Sydney and Melbourne
Moreover, the concept of Income elasticity can also be considered to support this view of increasing housing prices (Su and Qian 2018). As income of Australian citizens has increased sharply for the last few years, those people have intended to buy new houses for them. This is shown in figure 2. It can be seen from this above figure that income of Australian people has increased drastically since 2013 (Tradingeconomics.Com 2018). Being a luxury good, a small increase in income of customers has influenced the demand for houses to increase by large amount.
In addition to this, supply side factors are also needed to consider. Excess supply of a product has forced the price of it to decrease by some amount. However, for housing market in Australia, excess supply cannot influence the price to decrease noticeably (Wade 2018). In these two cities, the government has increased the number of available houses that can fulfill the excess demand for this durable item. However, like other commodities, a house does not possess any substitute product. For instance, demand for houses within the city is higher compare to the houses of outskirts areas.
Hence, from the above discussion, it is seen that house prices have increased for various reasons. However, by applying some affective monetary and fiscal policies, the government can reduce this higher amount of prices. Firstly, the Australian government can increase the rate of interest through its monetary policy. This increasing rate of interest can lead people to lend less amount of money from banks. This in turn can reduce the demand for houses due to lack of capital availability among people (DeFusco and Paciorek 2017). Secondly, strict rules for purchasing properties can also negatively influence the demand for houses. However, under this situation, demand for house rents can be increased (Charles 2017). Thirdly, by decreasing foreign interest in housing market, the country can also influence the demand for houses significantly. Being capital cities, both Sydney and Melbourne has possessed economical importance for which, most of the foreign customers intend to buy a house within these two cities. The government, by implementing affective policies, can control this increasing demand of foreign customers. For instance, the government can impose extra charges on foreign customers for buying a house within these cities (Feldstein 2017). Lastly, the government can increase the supply of houses by constructing more apartment buildings. Moreover, for houses of outskirt area, the government can provide excess facility like charging lower prices, low interest rates for lending money or other financial supports. Those factors can influence customers positively to buy a new house.
According to the SGS Economics and Planning (SGS) of Australia, Sydney and Melbourne have contributed significant amount to the country’s national income. These two countries have jointly contributed 68.8% to the gross domestic product (GDP) of Australia, during 2016-17 (Sgsep.com.au. 2018). With this highest amount of contribution, both Sydney and Melbourne are developing their economic performance since 2015-16. Sydney has possessed a strong economical condition as it has string financial sector along with trading and manufacturing one. This in turn, has helped the city to become the largest economy of Australia. Sydney has possessed strong banking network as 44 authorized commercial banks can be found over here (Feldstein 2017). In addition to this, it has received significant amount of tourists from all over the world. The chief attraction of this city is the Sydney Opera House (McLennan, Becken and Moyle 2017). Manufacturing sector, by consisting with advanced electronics, food processing and biotechnology, has become the largest hub in Australia.
Analysis of Price-to-Market Rent Ratios (PTR) for Sydney and Melbourne
Melbourne, the state capital of Australia, has also possessed economical importance. The city has higher rates in education, health care, entertainment, research and development. Moreover, tourism and sporting sectors have also earned huge economical importance. For this reason, this state capital has become the most residential city in this world since 2010 (Melbourne.geografia.com.au. 2018). Melbourne has become one of the leading financial centers of the Asia-Pacific region. According to the Global Financial Centres Index, this city has ranked among the 15 most competitive financial center, all over the world. In addition to this, the city is referred as cultural capital of Australia. Australian impressionism, footballs, films and television industries have founded over here.
Thus, it can be stated that both cities have possessed noticeable position from economical and cultural perspectives. This can influence a young professional to buy a house in Sydney or Melbourne irrespective of higher prices. Those cities have offered huge employment opportunities through various sectors like tourism, research and development and trade (Backman and Nilsson 2018). Hence, it can be easier for a young professional to obtain a proper job, based on educational qualification. Moreover, cultural sectors have provided huge opportunities for relaxation and outing, which have higher demand among young generation (Richards 2018). Thus, those factors have positively influenced the demand for houses within these two cities.
In conclusion, it can be stated that dwelling prices in both Sydney and Melbourne are very high. Huge population growth along with increasing income of citizens and lower rate of interest has led the demand for houses to increase noticeably. On the other side, due to insufficient supply of houses, both cities have experienced excess demand, which in turn has helped to increase these prices. However, through imposing some monetary and fiscal policies, the government can control this increasing trend of prices. For instance, by increasing the rate of interest and imposing extra charges on foreign buyers, the government can reduce this excess demand for dwellings. In this context, it can be stated that Sydney and Melbourne have possessed socio-economical importance for which young people intend to buy a house within these two cities without considering higher prices.
References:
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ABC News. 2018. Australian property ‘severely unaffordable’ by global standards. [online] Available at: https://www.abc.net.au/news/2018-01-22/australian-housing-unaffordability-experts-disagree-on-extent/9349796 [Accessed 15 Apr. 2018].
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Scutt, D. 2018. Sydney and Melbourne are most at risk of a significant property price correction: JP Morgan. [online] The Sydney Morning Herald. Available at: https://www.smh.com.au/business/the-economy/sydney-and-melbourne-are-most-at-risk-of-a-significant-property-price-correction-jp-morgan-20180126-h0opnm.html [Accessed 15 Apr. 2018].
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Wade, M. 2018. Housing supply alone won’t fix the affordability crisis, modelling shows. [online] The Sydney Morning Herald. Available at: https://www.smh.com.au/business/the-economy/housing-supply-alone-wont-fix-the-affordability-crisis-modelling-shows-20171119-gzobxa.html [Accessed 15 Apr. 2018].
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