Demand for Homes in Australia
Topics: Demand and Supply, Economic Efficiency, and Market Failure and Government Intervention
The article “Australia’s ‘significant’ housing shortage” by David Scutt on 23rd March 2016 presents the condition of Australian real estate market. In the recent years, the demand for houses in Australia has outweighed supply thus creating a shortage in the market. Australia is said to be having a shortage of approximately 250,000 housing units. The scarcity of homes in this country is attributed to both supply and demand factors. On the supply side, the country has encountered underbuilding of houses in the past decade thus reducing the overall supply to the market. The factors that have amplified the demand for homes as highlighted in the article are population growth and household incomes. Major cities like Sydney, Brisbane, and Melbourne have had population influx leading to a high demand and hence shortage.
Moreover, with positive economic growth, the incomes of families has increased and hence an increase in demand. The primary concern arising from this situation is affordability of houses. The shortage of dwelling units has hiked the prices of homes thus leading to affordability crisis especially to the low-income earners. Although more houses are being constructed, the scarcity of homes is not likely to end soon.
This paper intends to examine essential microeconomic concepts presented in the article discussed above. Firstly, the paper will explore supply and demand of homes in Australia together with the associated determinants. Market efficiency will also be analyzed by examining the consumer and producer surplus in Australian housing market. The essay culminates by exploring market failure and possible solutions the government can adopt to solve the issue of the housing shortage.
Demand for Homes in Australia
Demand entails the willingness and ability of the clients to own a product or experience a service at a given time. In Australia, the demand to own homes is influenced by several factors. For examples, families in the main cities like Sydney and Melbourne have experienced a rise in their incomes and thus increased their demand for homes. The increase in the population of cities in search of opportunities has also added pressure to the demand for dwelling units. Low cost of borrowing for homes and ease access to credit have increased money in circulation and thus driving up demand for homes. Moreover, the investor demand which is fueled by tax concessions has been blamed for worsening the housing shortage crisis in the country. Investors, both local and foreign, purchase homes not for use but in anticipation of capital gains on resale. These activities have significantly raised the demand for houses and hence increase in prices.
Supply of Homes in Australia
Graph 1: Increase in Demand for Dwelling Units in Australia
The factors mentioned above have caused an increase in demand for homes in Australia. This situation is demonstrated by the shift of the demand curve towards right from D1 to D2. The change in the demand curve results in growth in dwellings demanded from Q1 to Q2. Similarly, the price of homes increases from P1 to P2. As the price hikes, it becomes difficult for the low-income earners to secure a dwelling in the cities.
As noted earlier, there is undersupply of homes in Australia. Studies show that several factors impede the delivery of dwellings in Australia. Foremost, the planning process of constructing homes is said to be excessively complicated. Such bureaucracy delays the approval of development plans. The inadequate provision of core infrastructures such as roads, water and sewerage, and energy by the government also hinders the delivery of new houses. In some cases, the property developers have to incur the cost of infrastructure which they always pass to the home buyers through high prices. Furthermore, stringent land use policies and insufficient finances reduce the supply of additional dwellings in Australia.
Graph 2: Reduction in Supply of Homes
The reduction in the provision of houses due to the factors discussed above is shown by the shift in the supply curve towards left from S1 to S2. Consequently, the homes provided to the market declines from Qe to Q1 while the prices increase from Pe to P1.
Graph 3: Shortage of Houses
There are imbalances between the demand and supply of homes in Australia. The demand outweighs the supply. The number of homes required is Q3 whereas the number of homes provided by the developers is Q1. The disparity between Q3 and Q1 represents a shortage as shown on graph three above.
The functioning of any market usually results in producer surplus and consumer surplus. Producer surplus entails the difference between the price the supplier is willing to sell a product and the actual price received. On the other hand, consumer surplus refers to the variation between the amount the client is ready to pay for a commodity and the real price paid. In the absence of imbalances between the demand and supply of homes in Australia, the consumer and producer surplus can be demonstrated using the following graph.
Graph 4: Producer and Consumer Surplus
On the graph four above, the producer surplus is denoted by area below the equilibrium and above the supply curve, that is, area PeBC. On the contrary, the consumer surplus is represented by the area under the demand curve and above the equilibrium, that is, area PeBA.
Market Efficiency
However, since there are imbalances in the housing market, the surplus of the consumer is reduced considerably. This scenario is demonstrated in graph five below.
Graph 5: Increase in the Producer Surplus
The operation of Australian housing market increases the welfare of the producers as they charge prices above the equilibrium point. Area AKPeB shows the added producer surplus. Now the total new surplus is denoted by portion AKC.
Market failure usually occurs when the free market causes an inefficient allocation of the resources. In the housing sector, market failure is depicted by events such as an increase in the prices of houses leading to inequality, social issues resulting from substandard dwelling units, and environmental costs caused by the establishment of new houses. Failures in the housing market are known to have an adverse impact on the existence of individuals and the entire economy. For instance, key employees in the public sector may not afford to live in their work locations and thus subjected to long distances. This situation does not only reduce the productivity of workers but also hinders the employability of the unemployed as private firms find it difficult to recruit individuals who reside significantly far from the workstation.
In Australia, failure in the housing market is shown by the rise in the affordability crisis. Many people especially the low and mid-income individuals struggle to acquire houses in the major cities like Sydney and Melbourne. The shortage of homes resulting from undersupply and increased demand has made the prices to hike and therefore unaffordability. Studies show that some of the actions of the Australian government have contributed to this crisis. For example, in the past decade, the government has been providing tax concessions to investors to encourage investment in the real property and supply of houses. However, this approach has since backfired as the measure increased speculative demand among the investors and hence government failure. The investors buy the homes and hold them in anticipation of a price hike for capital gains. The investor activity, therefore, has increased the demand for homes and shortages, price increase and unaffordability.
Conclusion and Recommendations
The housing unaffordability in Australia requires government intervention to restore the current anomalies. The government has a significant role to play because it has control of both the supply and demand variables resulting in a shortage. Foremost, the government should strive at those measures that will increase the supply of homes to guarantee long-term certainly in the housing industry. For example, the leadership should take an active role in the development of essential infrastructures such as roads, energy, water, and sewerage to increase the supply of suitably located land for the construction of new homes. Better infrastructure will also be vital in ensuring that the property developers do not pass the associated costs to the purchasers of new dwellings. There is also need for the government to relax some of the stringent land utilization policies to encourage the construction of homes in the cities. Land usage plans bring compliance costs to the developers who tend to pass the costs of the purchasers. Additionally, the government should work with developers and charitable institutions involved in the delivery of affordable dwelling units to the Australians. The leadership should avail the necessary policy and financial support to these parties to complement their works in the community. On the demand side, the state should formulate policies to curb on immigration and also limit the tax concessions availed to the speculative investors.
Davidson, N. M. Affordable housing and public-private partnerships. Routledge, 2016.
Gurran, Nicole, and Peter Phibbs. “Housing supply and urban planning reform: the recent Australian experience, 2003–2012.” International Journal of Housing Policy 13, no. 4 (2013): 381-407.
Haslam McKenzie, Fiona M., and Steven Rowley. “Housing Market Failure in a Booming Economy.” Housing Studies, 2013: 373-388.
Mankiw, N. G, and S Cosgrove. Principles of microeconomics. Stamford, CT: Cengage Learning, 2014.
McLaren, John, Allan Yeo, and Michael. Sweet. “Australia is Facing a Housing Affordability Crisis: Is the Solution to this Problem the Singapore Model of Housing? .” Australasian Accounting Business & Finance Journal 10, no. 4 (2016): 38-57.
Rowley, Steven, Rachel Ong, and Marietta Haffner. “Bridging the Gap between Housing Stress and Financial Stress: The Case of Australia.” Housing Studies 30, no. 3 (2015): 473-490.
Scutt, David. “CHARTS: Australia’s ‘significant’ housing shortage.” Business Insider, Australia. March 23rd, 2016. https://www.businessinsider.com.au/charts-australias-significant-housing-shortgage-2016-3 (accessed April 29th, 2017).
Yates, Judith, and Mike Berry. “Housing and Mortgage Markets in Turbulent Times: Is Australia Different? .” Housing Studies, 2011: 1133-1156.
Order an Essay Now & Get These Features For Free:
Turnitin Report
Formatting
Title Page
Citation
Outline
