Describe about the Business Macroeconomics for Rising Business Household.
The increasing prices of houses are becoming an issue of major concern in Australia. The property price in Australia is on increase since the year 2001 particularly in Sydney. The sharp increase in market prices of real property in Sydney has made it the most expensive property market. The housing prices are regarded as unsustainable and unaffordable in Sydney market and this is becoming a major issue of debate around the country (Burges, 2016). In this context, the present essay place emphasises on the reasons behind surging house prices in Australia particularly in the Sydney market. Also, it aims to provide macroeconomic solutions that can be undertaken by the government for ensuring affordable housing for the younger generation.
Reasons behind Australia’s Surging House Prices
Surging house prices means a sudden increase or hike in housing prices/rent by the government. The main reason for the increase in house prices in Australia is on account of restrictions imposed by the government on land supply that has significantly enhanced the cost of land. The lesser availability of land in highly populated areas of the country such as Sydney is contributing largely to the increase in house prices. The government restrictions are causing the increase in land prices due to high taxes and therefore making the houses less affordable for the general population. The house prices in Australia have increased by 1.6% recently as per the data released by Home Value Index (Scutt, 2016). The Reserve Bank and the Australian Prudential Regulation Authority are placing huge emphasis on implementing measures for absorbing the sudden rise in housing prices. The property prices are recorded highest in Sydney with surging by 19.9% based on the figures from the Australian Bureau of Statistics (ABS) (House price rises accelerating in Australia, 2016).
The Reserve Bank of Australia (RBA) has maintained a very low cash rate of about 2% that is resulting in making large money for Australian banks. The increase in demand among the population of the country due to lower cash rate has caused the sudden increase in the house prices. Therefore, the limited supply and high demand is resulting in higher real estate prices in the country. The increase in population of the country is further likely to increase the demand for houses and such the housing prices are expected to increase in Australia. Also, the increase in purchase of residential property by foreigners is also responsible for surging housing prices in the country (Scutt, 2016). The foreign countries are showing increasing interest for real estate investment in Australia responsible for increase in house prices. The increased foreign investment in the residential sector has raised the house prices of Australian dollar 34.7 billion in the year 2014 as compared to the previous year. In addition to this, cost of constructing houses in Australia is on increase with rise in labour costs. This is also acting as a significant factor behind rise of house prices in Australia. Sydney has the most expensive residential market in Australia followed by Melbourne, Canberra and Brisbane. Thus, on account of all the reasons stated above Australia is recognised as severely unaffordable as per the reports developed by International Housing Affordability Survey. The high un-affordability of houses in Sydney particularly is due to urban consolidation that has caused high demand for houses availability in the city. The rising house prices in Australia are expected to suffer a crash due to bursting of rising house bubble. Australia has avoided the housing crash till date due to strict regulatory standards than the US that caused bursting of house bubble in the period of global financial crisis in the year 2007-2009. However, it is predicted that Australia is likely to suffer market crash due to overvaluation (Burges, 2016).
Source: Scutt, D. 2016. Australian house prices are surging again. [Online]. Available at: https://www.businessinsider.com.au/australian-house-prices-are-surging-again-2016-6 [Accessed on: 10 October 2016].
Macroeconomic solutions that can be undertaken by the government for ensuring affordable housing for the younger generation
In the above paragraph we have discussed the problem of surging house prices in Australia. The main cause of rising house prices in Australia is sudden increase in demand and limited supply of houses. The government need to undertake some macroeconomic solutions for ensuring the affordability of houses in Australia. One such possible macroeconomic solution includes tightening the fiscal policy and significantly reducing the pressure from RBA to increase the interest rates (Debelle, 2004). The maintenance of lower interest rate would ensure the availability of other items in household budget and thus absorbing the surging house prices in Australia. Also, the government should end its policy of providing subsidies to the buyers purchasing home for the first time as they are also increasing the housing un-affordability issue in Australia. The subsidies policy of the government is regarded as ineffective policy as they are leading to increase in housing prices in Australia. In addition to this, the government should also implement some measures for increasing the supply of land that would bring down the housing prices (Hawtrey, 2009).
The government of the country can increase the availability of the land in the outskirts of cities areas such as western Sydney. The increasing supply of land will lead to lowering of house prices in Australia by creating a fit between demand and supply. However, the government should also implement some measures for reducing the house prices of people living in densely populated inner city. The population of the country who brought homes in inner area have to also pay higher mortgage and are also affected by other problems such as higher cost of living and fuel prices. The effective macroeconomic solution for making houses affordable to people living in densely populated area is better urban planning. This is essential for significantly reducing the cost of living in inner-city areas and thus making houses affordable for them as well (Kuester, et al., 2012). The government should also adopt proper policies for preventing mortgages from getting very high through stricter regulations for lending of home loans. The adoption of such regulatory policies by the Australian government would help in less flow of money in the market and thus the prices of houses in the country would increase to a less extent. The government should also place emphasise on reducing the fuel prices for making the public transport systems affordable. This would reduce the cost of living in inner-city areas of densely populated cities of the country such as Sydney. It would also provide a viable option for the people living in areas that have high house prices to shift to outer areas having significantly lower fuel prices. This will help in meeting the increasing demand of houses by making them more affordable to the general population of the country. The increase in investment from the government in real-estate sector can also prove to be an effective macroeconomic solution for reducing the surging house prices. It would help in obtaining economies of scale thereby bringing down the house costs in metropolitan cities of Australia such as Sydney and Melbourne. The government should also take initiatives for making public housing available for the people having low income and thus making houses affordable for them. Such initiatives from the government would help in addressing the inequality in housing affordability as the people with relatively low income at most impacted by the rising property prices. The people with high income level have high housing affordability than with people who have less income generation. Thus, the government is required to implement proper policies initiatives for reducing the disparity that exist in housing affordability in Australia. The government of Australia is presently emphasising on supplying land for low income people such as teachers for reducing the inequality in housing affordability in the country. The increase in house prices is also having a large impact on suddenly rent prices and as such is becoming one of the biggest economic problems in the country. Therefore, the government has also to develop effective policies for reducing the rising rent prices through tightening the bank lending practices. The lending practices of the banks should be tightened that reduces easy availability of house loans to the people. Easy availability of house loans results in large money flow into the banks with increase in number of people opting for bank loans. The increase money flow into banks will further increase the demand of houses and thereby leading to raise in house prices. In this regard, the government should properly monitor and govern the bank lending practices to reduce the easy availability of loans to all the population of the country. The government should reduce the restrictions imposed on the supply of land that is causing rise in house prices in Australia by increasing the land cost. Thus, these all macroeconomic solutions should be imposed by the government for ensuring house affordability for the younger generation (Kazemi et al, 2016).
Conclusion
Thus, it can be summarised from the overall discussion held in the essay that government must focus on long term goals rather than short term goals for the betterment of the country and its residents. The main reason for the increase in house prices in Australia is mismatch between demand and supply, bank lending practices and rising interest rates. The Australian government should develop macroeconomic solutions that address all of the reasons responsible for increasing house prices in the country.
References
Burges, R. 2016. Australia’s house price madness is getting worse. [Online]. Available at: https://thenewdaily.com.au/money/property/2016/01/26/australias-house-price-madness-getting-worse/ [Accessed on: 10 October 2016].
Debelle, G. 2004. Macroeconomic Implications of Rising Household Debt. Bank for International Settlements.
Hawtrey, K. 2009. Affordable Housing Finance. Springer.
House price rises accelerating in Australia. 2016. [Online]. Available at: https://www.globalpropertyguide.com/Pacific/Australia/Price-History [Accessed on: 10 October 2016].
Kazemi, H. et al. 2016. Alternative Investments: CAIA Level II. John Wiley & Sons.
Kuester, K. et al. 2012. Sovereign Risk, Fiscal Policy, and Macroeconomic Stability. International Monetary Fund.
Scutt, D. 2016. Australian house prices are surging again. [Online]. Available at: https://www.businessinsider.com.au/australian-house-prices-are-surging-again-2016-6 [Accessed on: 10 October 2016].
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