Demand And Supply Of Housing In Australia Essay

Question:

Discuss about the Demand and Supply of Housing in Australia.

Answer:

Introduction:

Demand and supply are two terms of key importance in Economics, which are inter-dependant concepts and together they determine the equilibrium of a market, its stability, price levels and the quantity of production of the concerned good or service in the market. In other words, demand and supply of goods and services are the yardsticks on the basis of which the primary economic agents (Producers and Consumers) interact in a market and try to come to a stable situation. This report tries to analyze the scenario of the contemporary housing market in Australia, with the help of these two economic forces. For studying the housing market conditions of Australia, the article named “Housing supply and demand in balance: Fitch”, by Michael Janda, has been referred to (Abc.net.au, 2017).

Housing and Housing Market:

In economics, resources can be of four types: land, labour, capital and entrepreneurship. Any kind of investment in an economy is regarded as an addition to the existing capital stock of that economy, during a particular period. Housing, a variant of residential investment, therefore, falls in the category of capital resources of an economy. People invest on housings not only for staying purposes but also keeping in mind the long term asset building perspectives (Marekwica, Schaefer & Sebastian, 2013). The supply and demand of housing in an economy, in a specific time period, acts as a significant economic indicator, as they not only show the condition of the real estate sector of that economy, but also indirectly shows the overall conditions of other related industries like those of banking, construction and raw materials. “Housing Start”, a measure of the number of new residential constructions, started in an economy, in a particular month, also provides a picture of the over-all growth of the economy, its future growth prospects and the standard of living of the residents of that economy (Kydland, Rupert & ?ustek, 2016).

The article referred, tries to portray a picture of the contemporary condition of the housing market of Australia. The builders and construction companies are on the supply side or producer side of this market, whereas, the residents of the country are on the demand side or the consumer side. According to the findings of the article, the demand and supply of housing in Australia are more or less in a balanced condition (Martin, Pawson, & Van den Nouwelant, 2016). The article draws a comparison of the country’s housing market with the counterparts of countries like Ireland, Great Britain and Spain. It argues that though the supply of housings in Australia is a little high (One new home for 1.75 people where the average household size is around 2.6) (Abc.net.au, 2017). However, the numbers are nowhere near that of Great Britain and Ireland. These countries, due to huge booms in this sector, prior the Global Economic Crisis (2008), built so much in excess that following the economic crisis, they saw a immense downfall in demand as well as prices of new housings, leading to even demolitions quite a few houses (Jord?, Schularick & Taylor, 2016). However, the article, taking help a two year old analysis by ABC News, makes a general conclusion, stating that though the gap between demand and supply of housings in Australia are not very high, the country is still constructing more dwellings for its residents that is required.

Economic Analysis:

Equilibrium in a market, in terms of economics, is that condition where the demand and the supply of the commodities of that market are identical and from where neither the producers not the consumers have any incentive to deviate. Any other different situation can create disequilibrium condition in the economy (Nissanke, 2012). In the above mentioned scenario, the condition of the housing market of Australia vis-?-vis that of the two other countries can be analyzed with the help of the following diagrams:


Figure-1 shows that due to an economic boom, prior the Economic Crisis, in the countries of Ireland and Great Britain, the supply of housing increased hugely. However, post the crisis, the recessionary structure of these economies led to a fall in the demand for new housings, thereby creating an excess supply (AB) as supply of housing could not adjust as rapidly as demand. and forcing the producers to decrease their price levels or demolishing a number of unwanted housings (Abc.net.au, 2017).

Figure-2 is a rough representation of the scenario in contemporary Australia, drawing reference of the article. It shows that though the supply of housing in this country is more than the demand, the gap is not as huge as that of the former ones. This implies that there will not be a substantial difference in demand and supply and the price levels will not be affected adversely as the excess supply o housing is not huge (Ngai & Tenreyro, 2014).

Australia is currently experiencing impressive economic growth and the standard of living of the country is seeing an upward surge in general. People are buying new houses also for asset building in the form of residential investment and it may be the case that the persistence of demand in this sector is maintaining a good price level and thereby encouraging the builders to supply more than the number of housings actually required (Abc.net.au, 2017). Therefore, with the help of the economic tools of demand and supply it can be shown that the housing sector in Australia, though producing more than the number required, the gap is not adversely big and the demand and the supply of housings are more or less balanced.

Policy Recommendations:

Like any other capital assets, the market for housings is also a dynamic one, with demands changing more or less frequently. However, supply of housings cannot change as fast as demand because it takes considerable amount of time and money to create new housings. Due to this lesser flexibility of supply in this sector, any change in demand primarily leads to a change in the price followed by adjustments in the supply level (Wadud, Bashar & Ahmed, 2012).


In this case, much of the excess supply of housings in Australia is inaccessible, high priced ones, which only a few customers can afford. The adequacy of low cost private and rental housings are a matter of doubt (Nissanke, 2012). In this situation, to curb the amount of excess supply present and to grow the prospects of their business, the builders should concentrate on venturing into budget housings and decrease the over-production of luxury housings (Martin, Pawson, & Van den Nouwelant, 2016). The scope of expansion in the later sector gets limited after a certain point of tie and the demand is highly elastic and fluctuating, depending upon the stability of the economy. The market power should also be equally divided between the two parties such to avoid price distortions and biased outcomes unfavorable to one particular party

Conclusion:

With change in global economy, market dynamics of housing sectors in Australia are rapidly changing every day. Housings are no longer a final commodity for consumption but also an investment for future. Currently, though the market is balanced, consistent over production may lead to high excess supply in future leading to adverse outcomes for both the sides of the coin. Keeping this in mind, the demand and supply of housings should be monitored frequently and if required provisions for Government interventions should be kept in order to maintain equilibrium in the market

References:

Abc.net.au. (2017). Housing supply and demand in balance: Fitch. ABC News. Retrieved 7 August 2017, from

Abc.net.au. (2017). Will more housing drive down prices?. ABC News. Retrieved 7 August 2017, from

Jord?, ?., Schularick, M., & Taylor, A. M. (2016). The great mortgaging: housing finance, crises and business cycles. Economic Policy, 31(85), 107-152.

Kydland, F. E., Rupert, P., & ?ustek, R. (2016). Housing dynamics over the business cycle. International Economic Review, 57(4), 1149-1177.

Marekwica, M., Schaefer, A., & Sebastian, S. (2013). Life cycle asset allocation in the presence of housing and tax-deferred investing. Journal of Economic Dynamics and Control, 37(6), 1110-1125.

Martin, C., Pawson, H., & van den Nouwelant, R. (2016). Housing policy and the housing system in Australia: an overview.

Ngai, L. R., & Tenreyro, S. (2014). Hot and cold seasons in the housing market. The American Economic Review, 104(12), 3991-4026.

Nissanke, M. (2012). Commodity market linkages in the global financial crisis: excess volatility and development impacts. Journal of Development Studies, 48(6), 732-750.

Wadud, I. M., Bashar, O. H., & Ahmed, H. J. A. (2012). Monetary policy and the housing market in Australia. Journal of Policy Modeling, 34(6), 849-863.

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