This report looks at the housing sector in Australia through the lens of the most recent report titled Housing supply responsiveness in Australia-distribution, drivers and institutional settings. This is based on a study by the Australian Housing and Urban Research Institute. (Ong, et al., 2017) It inquires into the links between housing policies, labour force participation and economic growth in Australia. More specifically it attempts to understand the supply side dynamics of housing so that policy making can be aided and housing can be delivered effectively for all. This report focuses on new housing only. It does not look at any additions or deletions to the total stock of housing due to demolitions and conversions.
Theory Behind The Prescriptions
A simple demand and supply model can be assumed to fit the market for housing in Australia, except that the market is not homogeneous .We have separate markets for different income levels in terms of elasticities and constraints. So we can havea low cost housing market that is separate from middle income housing market. Still further we have an upper income housing market. The differentiator in thesemarkets is the income of the prospective buyer.
In a fre market with no government constraints and rule on pricing the equilibrium is simply the point where demand equals aupply. This is shown by the point E, where Q* amount of houses that are exchanged in the market. The price that prevails is P*. This simple analysis can be disturbed by imposition of price floor or price ceiling or any limit that we set on the quantity of houses that be exchanged. The equilibrium can shift due to a change in demand and /or supply determinants.
Housing Sector In Australia
We must note that housing is an importanty sector that drives growth in the economy. This sector is the key sector that is watched for signals of growth or recession in any economy. This explains why this report looks at the issues in housing sector, which maybe solved in order to unshackle the growth potential of Australian economy. More specifically this report looks at the supply side of the market for housing. It deals with the supply side of the markets and investigates:
- The degree of response of supply to demand pressures.
- The response of housing to various drivers like price, population, regional aspects.
Economic literature tells us that supply must respond to a few determinants. One of these is productivity gains. As productivity rises, incomes rise which pushes up demand for housing. It is now up to supply to increase in responses to greater demand. If supply remains constant then prices will rise from P* to P1. An increase in supply can soften this increase to P2 only as shown in figure 2. (Anon., n.d.)Some other determinants include migration to better areas, higher income, policy measures like tax rebates and other policy measures that boost supply.
Property prices in Australia have risen sharply. As per some estimates property prices in Sydney rose by 20% in 1 year , while the average for the country stands 12.9%. (Hutchens, 2017). Further prices rose by 17.15% in Melbourne, 13.64% in Canberra, 11.05% in Hobart (11.05%), and only Perth and Darwin saw a decline. ( see chart below) There is a distinction between houses and units, such that unit prices grow slowly and show less rapid rise. For 5 major cities, house prices rose by 13.35% in 2016 over 2015, as compared to 9.83% rise for units/apartments. This price rise in driven by easier mortgages which are created by RBA’s interest rate cut to 1.5% and ‘a rebound in buy-to-let investor activity during the second half of 2016.’ (Smyth, 2017)
Given these facts before us the report makes the following findings:
- Lowcost housing market is less responsive than mid to high cost segments , so that growth is taking place more in the latter than the former. This suggests impediments to the trickle down effect which are structural in nature.
- The supply elasticity is calculated at 4.7 which implies that 1% rise in price of houses in Austalia leds to increase of 4.7% in supply. The cosrresponding value for units is lower at 3.9 only. This means that supply is relatively unresponsive to price rise. In a diagram this can be seen as a steep supply curve, (Suman, n.d.) so that any rise in demand leads to higher prices ( red arrow). The dynamic response of supply to this rise is slower, resulting in a lower increase in supply ( as compaerd to demand rise). The overall result is high prices. These numbers add up an increase in housing stocks of 0.05% - 0.09% only. These numbers for total housing stock are extremely low, which explains the fact that higher demand for property is causing price rise akin to an asset bubble creation.
- The problem is more severe because low cost housing is responding even lesser. Most of this price rise is in mid to high cost houses, exaggerating the shortage of houses for low income households. Data shows that only 5% of approvals were given to the bottom 20% of the house and unit real price distribution. (Boyd, 2017)
- Also whatever new supply is getting built is concentrated in already developed areas. This is exacerbating the regional imbalance in availability of houses. Lopsided growth and regional imbalances are the natural result of such developments.
- At a policy level new measures are required to help ease the imbalances that have been created in the housing market in Australia. These imbalances exist in terms of income levels of buyers, geography of new houses, rural-urban divide as well as developed and less developed areas.
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Boyd, E., 2017. Dailytelegraph.cm.au. [Online]
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Hutchens, G., 2017. THe guardian.com. [Online]
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Ong, R. et al., 2017. Ahuri.edu.au. [Online]
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Smyth, J., 2017. FT.com. [Online]
[Accessed 20 August 2017].
Suman, S., n.d. [Online]
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[Accessed 19 August 2017]