Australia has one of the most diverse housing markets in the world in terms of its drastic growth levels. The cities of Sydney and Melbourne are the prime examples of how the housing market is expanding at an alarming rate. The level of this growth is outpacing availability of houses for most of the population. The say takes an analytical perspective in delving into the factors that are contributing to this soaring prices. More so, the essay builds on economic concepts to bring out the existing situation in the housing market. The paper sums up with recommendations for the eventual course of action for the correction of the predicament within the housing market.
Housing market for Sydney and Melbourne Australia
The surging housing market prices in both Sydney and Melbourne is attributed to a number of factors that have an influential presence in demand and supply. First, there has been a huge surge in the property investments in these two cities chiefly motivated by the Reserve bank’s decision to cut the interest rates. A reduction in the interest rates means that access to banking loan facilities were made affordable to most of the population. Fundamentally, interest rates play a big role in adjustment of the aggregate demand and supply (Ferguson 2017).
In this case, when consumers are able to easily access loans from Australia’s banking institutions, it increases the tendency for investment opportunities as there is more money in the economy. Investors are therefore able to seek out for these opportunities (Bracke 2015). The result is that an increase in the aggregate demand is created which pushes up the prices of the property markets. There are more investors chasing few houses in these two houses available in the market.
In the diagram above, a cut in the interest rates as advanced by the Reserve bank of Australia causes a rise in the Aggregate Demand as shown by its movement from AD to AD2. Initially before this cut was introduced, the housing market prices stood at P1 which alludes to equilibrium market prices while the aquarium quantity is indicated by Y1. However, an introduction of a reduction of interest rates makes access to loan facilities cheaper and as a result; investors can easily get loans to buy properties. This creates an increase in aggregate demand as indicated by the movement from AD to AD2. Consequently, prices will rise from P1 to P2 while at the same time the equilibrium quantity that the market has to provide to meet this demand has to rise as well as indicated by the movement from Y1 to Y2.
While a reduction in the interest rates by the Reserve Bank has further led to an increase in the prices for property market in Australia, future speculations on capital gains among the investors has also been overwhelmingly contributor to the reported increase in prices of houses. Basically, the demand for any good or service is bound to rise hence its price as well when expectations in the future are meant to yield rewards and benefits to the investor. In this case, it is a matter of risk taking more than investment. However, speculation in the housing market has for a long time yielded results that investors have expected (Ferguson 2017).
Sydney and Melbourne have been casualties in this speculation. Just like the interest rates factor, speculation in the market means that investors are attracted by the future benefits they will realize upon investment in the housing market. As a result, this increases the aggregate demand. More investors as Sweeney (2017) establishes will take up the initiative to enter the market leading to an upsurge in the demand and as the law of demand holds, an increase in demand leads to a rise in the price of the goods and services while a reduction in the demand leads to a reduction in the prices. In this case, the former prevails.
Investors motivated by the future capital gains on the same take up investment ventures thus pushing up the housing markets. A rise in the investment percentage aligned to the new mortgage demand is a testament that the market is not likely going to slow down as well (Shi, Jou & Tripe 2014). At 57%, it is substantially higher than the long run average. It basically indicates that the speculation about the future capital gains does not look to slow down because prices have been rising up in response to this behavior.
The rising population in these two cities has further regurgitated the problem with regard to the rising housing market prices. Sydney and Melbourne are among the cities in Australia today that have witnessed and continue to show a high rise in the population. A rise in the population according to Yates (2014) creates an increase in aggregate demand. More people are competing to own houses in Australia today than anything else. Since housing market is price elastic, consumers are bound to react to the changes in the prices (Smith 2017).
Shortage in supply to meet the demand surplus in the market means that prices have to increase in response to these eventuality as a result. While the industry has witnessed an upsurge in the investments, it is still not enough to sustain the demand that has to be met. While population keeps on increasing, it is bound to create more increase in demand as well and as a result, the housing market will further plunge into uncertainty with regard to the achievement of any price stability.
Employment opportunities in Melbourne and Sydney has also contributed to the rise in the housing prices. Today, there are more opportunities for people to get employed in Sydney and Melbourne than any other Australian city. Between 2008 and 2017 out of the 913,330 jobs created 28% and 33% were respectively created in Sydney and Melbourne (Cornwell et al 2016). This means that these two cities are sought after by most job seekers both local and international. Migrants need somewhere to live and so they have end up moving to either of these cities which contributed to 67% of the jobs nationally in the last close to a decade.
The soaring prices in the housing market in Sydney and Melbourne need an urgent attention from all the stakeholders. With affordability rising every single day, it makes it a pipe dream for most people in Australia to own houses in the near future (Merceille 2014). Overcoming the rising prices has to center on curbing demand in these cities. Curbing demand will involve the following. First, reduction of the capital gains tax discount on properties as well as imposing a tax on vacant properties. For a long time, investors have targeted properties that are undeveloped through a hastily rushed way to get ownership of the same (Jacobs, Perreira & Williams 2013).
When taxes are imposed on these properties, it will effectively make investments in the property market less attractive hence locking out investors as a result. A similar impact will result should a reduction in capital gains be advanced as well. Furthermore, a tax on vacant land according to Bordo & Landon-Jane (2014) will at least be an encouragement to owners to make use of unutilized housing available for occupation. However, a bigger challenge lies in coming up with a tax that is substantially enough to encourage people to rent the house.
Secondly, demand for the housing market in Sydney and Melbourne should be slowed through a series of incentives such as developing other cities to realize creation of more employment opportunities which will then attract more migration there. Additional fees could also be advanced in these cities with the chief reason of reducing demand as well. Partnership with the private sector could go a long way in establishing lucrative opportunities in other cities such as Perth to ensure that population is reduced.
The supply side of the reforms should involve increasing the housing supply although this must recognize a favorable price points. It can be realized through reduction on the developmental costs. The government should look at preventing investors from hoarding developable land from the market (Lyons 2015). A more efficient method to achieve this can be done through imposing a tax on the zoned and undeveloped land.
Despite the exorbitant costs associated with owning a house in both Sydney and Melbourne today, the following methods will provide an easing way to own a house nonetheless. First, taking a government grant can be vital because at that point in time, the savings will be a little bit less plus miscellaneous costs will end up trouncing the eventual cost of the house. The importance of taking a government grant is that it provides room for slow payments unlike mortgage plans that usually have a high interest rates as well as a shorter payment period. Before commitment to this government grant, it is important to first off pay any personal taxes to reduce the burden.
Also, making deposits to my mortgage broker will likely skyrocket the cost as well and so keep a lean budget will mean that any deposits will be off limits. Taking a mortgage is similar to committing to two liabilities. First, as a young professional I will be having a lot of student loans to pay off and so mortgage plan will only double the commitment to pay it all. At such higher rates therefore, another cheaper option will be to purchase a land property and construct for myself a house. This will be a lot cheaper than taking a mortgage plan as well.
For a young professional, moving with the parents should also be an option because it will be important enough time to make enough savings for eventual home ownership even with the current soaring prices in Sydney and Melbourne. Another way town a home with the high prices in the market can be in form of making a compromise on finishes. This involves taking properties that are in need of renovation because they are particularly cheaper. That means, looking for a house that is structurally sound and clean to a respectable and market standard. From this particular structure, improvement and renovations can be done at a much cheaper cost.
Conclusion
In conclusion, housing market in Australia is embroiled in uncertainty as indicated by the manner in which housing prices are rising each single day. The increasing number of foreigners who are heading to Australia searching for jobs is one of the main reasons why the aggregate demand for the housing market is rising. More so, speculation about the future with regard to the expected capital gains is another key reason established as contributing to the housing market soaring of prices. However, imposing taxes on undeveloped properties, development of other cities as well as creation of employment will reduce population concentration in Melbourne and Sydney.
References
Sweeney, N. 2017. How to buy your first home in 5 months! You’re Mortgage. Retrieved from: https://www.yourmortgage.com.au/article/how-to-buy-your-first-home-in-5-months-79354.aspx
Lyons, R. C. 2015. East, west, boom and bust: the spread of house prices and rents in Ireland, 2007–2012. Journal of Property Research, 32(1), 77-101.
Shi, S., Jou, J.B. and Tripe, D., 2014. Can interest rates really control house prices? Effectiveness and implications for macro prudential policy. Journal of Banking & Finance, 47, pp.15-28.
Yates, J., 2014. Protecting housing and mortgage markets in times of crisis: a view from Australia. Journal of Housing and the Built Environment, 29(2), pp.361-382.
Mercille, J., 2014. The role of the media in sustaining Ireland’s housing bubble. New Political Economy, 19(2), pp.282-301.
Bracke, P., 2015. House prices and rents: Micro evidence from a matched data set in central London. Real Estate Economics, 43(2), pp.403-431.
Bordo, M.D. and Landon-Lane, J., 2014. What explains house price booms? History and empirical evidence. In Macroeconomic analysis and international finance (pp. 1-36). Emerald Group Publishing Limited.
Jacobs, D., Pereira, D. and Williams, T., 2014. Inflation and the Cost of Living. RBA Bulletin, March, pp.33-46.
Cornwell, A., Hejazi Amin, M., Houghton, T., Jefferson, T., Newman, P. and Rowley, S., 2016. Energy poverty in Western Australia: A comparative analysis of drivers and effects.
Smith, J. 2017. Fears of bubble as Australian house prices surge, Financial Times. Retrieved from: https://www.ft.com/content/ac7e3960-181c-11e7-a53d-df09f373be87
Ferguson, J, 2017. Popularity is causing Melbourne housing market’s growing pains, The Australian. Retrieved from: https://www.theaustralian.com.au/news/inquirer/popularity-is-causing-melbourne-housing-markets-growing-pains/news-story/6cb034c937639d77c5ba5bf2850e2293
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