Essay: Australian Housing Sector - Prices, Demand, And Factors.

Price change of houses

A house is one of the most important assets owned by any household in Australia. It forms part of the household wealth as well as serving as an investment tool and a durable from which satisfaction in consumption is derived. A house can also be used as a security to secure loans for mortgages and business purposes.

Whenever the prices of houses change, it affects both the demand and supply of houses. This has a ripple effect on the suppliers and the consumers as well. For instance, the household’s disposable income will reduce in the event of an increase in the price of houses or rent. Changes in house prices will also affect the financial system depending on the financial stability at that particular time (McLaughlin, 2012). For instance during a recession, the prices houses will most likely reduce and this will in turn reduce the loan that an individual can acquire using the home as collateral. Therefore, the housing sector is an important part of the economy that should be understood well.

Within the activities of the housing sector, activities include constructing; developing and selling of different buildings for residential purpose. The interests of the housing sector are looked after by the Housing Industry Association (HIA) in Australia. The housing market is also part of this industry (Hia.com.au, 2017). Its functions include regulating the prices of the houses, supply and demand of the houses and the intervention of the government with respect to the rented sector and the housing market.

According to Janda (2016), there has been research on the estimates made by the Fitch Ratings with respect to Australian housing market. When speaking about these ratings, it refers to a global credit rating organisation who studied the new accommodations which are being developed keeping an eye on the growth of population in Australia. He had written an article which was published in the ABC website. He observed in this article that the Fitch Ratings predict that the new houses built are as per the growth in the population. Thus equilibrium exists between demand and supply (Davis and Zhu, 2011). The information will help the housing industry of Australia to understand the supply and demand of the homes. This will enable them to calculate the equilibrium price.

The economic recession in 2008 caused the price of houses to fall by 5%. This was shown by the clear change in attitude by the consumers where majority of the people were reluctant to buy houses. In addition, other factors such as high mortgage rates, higher interest rates and a tight method of acquiring credit, increased unemployment rates and job insecurity also played a role in fall in prices (Ball et al., 2010). During this period, it was difficult to obtain credit due to the tighter lending conditions. However, this conditions lead to the stability of the housing market.

House demands

Good economic recovery after the global financial crisis led to a slight increase in prices in the preceding years. This was probably as a result of the suppliers responding to the fall in price by reducing the supply of houses. The decline in supply coupled with the growth in demand from interested buyers who had previously been priced out, led to a small increase in the prices. Initially, the banking crisis had led the buyers to be reluctant to buy houses. Nevertheless, when they realised that the government was putting effort into stabilising the economy and the banking system, they gained confidence and re-entered the market. Low interest rates in big way assisted in the recovery of the market and prices (Newton, 2010).

By the end of 2016, the housing market in Australia was slowing down despite the growth of the economy. The prices increased by 4.65% in the eight major cities. This was a sharp slowdown compared to 10.53% last year. Melbourne had the largest increase where residential property prices increased by 8.2% followed by Canberra at 6%, Hobart at 4.9%, Brisbane at 4.3%, Sidney at 3.6% and Adelaide at 3.5%. at the same time prices in Darwin and Perth dropped by 6.5% and 4.8% respectively (Tumbarello, 2016).

When referring to demand it means the amount of goods or service that a person is willing to purchase for a certain price (Salvatore, 2011). The demand curve is generated by determining the connection between demand and price. Price and demand is based on an inverse relation. The amount demanded falls down when price increases.

When speaking of the housing industry, housing demand refers to the houses which the families are wishing to pay at the present housing rates available in the market (Strengers, 2012). In case the prices fall, the number of individuals intending to pay for the houses will increase at the present market price. However if the prices increase, the buyers will not want to pay for the houses leading to lack of demand (Farmer, 2007). The demand in the housing industry shows the singular demand of a group of individuals. Thus it can be termed as aggregate demand.

The diagram show that reduces of price leads to increase in demand for the houses.

1. Income of the population

Due to increasing productivity and export prices earning capacity increases. Households generate more wealth leading to more demand for houses. Productivity in Australia has increased and the country has been fetching higher prices for its commodity prices in the foreign market. This has in turn increased the average income and wealth of households (McKenzie, 2010). Therefore, it does not come as a surprise that the households have demanded more of second ‘holiday homes especially in the coastal region. This demand leads to higher prices for as long as the supply responses are limited.

2. Growth of population

Factors leading to demand for housing

The number of houses demanded will grow with increasing population. The population growth in Australia is owed to immigration for jobs. However, the average household has decreased in Australia mainly due to a number of reasons including couples marrying later in life, fewer children being born, and increased cases of divorce and separation in marriages. This cases increase the demand for homes in for the given population (André, 2010). Considering the projections of the demography, single person houses will outgrow family and community households.

 The population of Australia is growing strongly in relation to those of other advanced economies. A major cause of this is the high rate of immigration compared to other economies that it can be compared with (Andrews et al., 2011). High immigration rates have increased demand for houses especially for the job seeking young adults. In addition, the immigrants go to places where there is housing shortage such as Sydney while avoiding the countryside regions. In addition, many people will tend to relocate to places where friends and relatives are located and where they can easily access social and other amenities that make life comfortable for them. This is an indication of where there are job opportunities and the demand for housing facilities are.

3. Housing prices and rents

Due to increasing rates previously, the saving power of the households to buy new homes is reducing. This is resulting in increase in demand for rented houses and lowered demand for personal homes. The increase in rent charges over the years has made many people to desire to own their own homes. There is increased demand for own homes while the demand for house purchases remains ambiguous because of the increase in rent (Gruis and Nieboer, 2010).

4. Lowered rates of interest

With fall in the rate of interest, the accessibility to credit for the households will increase (Adams and Füss, 2010). Thus they will be able to have their own homes and the demand for houses will go up. However increase in interest rates will reduce the demand as less loan taking ability will exist.

The interest rates charged on a standard home loan reduced in the decade ending in 2012. This increased the amounts that the households could borrow and therefore they were able to bid more houses even those that were initially highly priced. The main factor that lead to the fall in interest rates was the fall in the policy interest of the RBA resulting from drop in inflation rates (Jacobs et al., 2010). There has been a reduced gap between the interest rates and the housing loan rates owing to more competition.

If this mechanism was the only way to determine prices of homes, then prices would have reduced again and rates would have increased. However due to delayed changes in the system, or prices may be 'sticky', as sellers are not willing to accept low prices (Yates and Bradbury, 2010). This would imply that affordability would only be restored by the gradual rise in incomes rather than a fall in nominal house prices.

5. Easier access to credit

In addition to reduced interest rates, the people in Australia are able to obtain loans easily due to financial deregulation. Non-bank financial institutions have made loans available to the people who demand housing facilities by tapping into the securitisation market. Since deregulation, potential borrowers can now afford to repay their loans and now have access to a wide range of products and credit from the Australian housing finance market (Burke and Hulse, 2010). Housing lenders can now allow borrower to access amounts that require a higher percentage of their income and can as well lend a higher proportion of the value of the property. Easier access to credit has increased the demand for houses especially the first homebuyers.

6. Speculative demand

Apart from people demanding houses for residential purposes, there is also the aspect of speculative demand. This attitude not only encourages home ownership, but has as well lead many households to take credit to purchase a second home as investment instrument for future income. In fact, investors acquire 75% of new home loans.

Except for the excitement about high technology stocks, Australians are now regarding property investment as a better decision compared to equities (Mitchell and Watts, 2010). This is driven by the self-generating nature of how the prices of houses increase. A majority of housing finance results from the high price of the houses already in place, which attract investors because of the increasing prices. This effect continues until the interest rates increase or a recession occurs.

7. Property investment- Due to the present interests on lending being low, people are investing in properties. This is resulting in demand to increase as people are having more purchasing power to buy the properties. People are investing their money well in ahead for the completion of the properties (Abelson et al., 2005). This is putting pressure on the builders to complete their projects within allotted time period. Thus in future there is possibility of increase in the gap of demand and supply. Thus the reserve bank can increase the interest rates to ensure that the lending capabilities of the buyers are decreased. During this period, the developers of the properties will be able to derive sources of finance to complete their projects (Fuller and Crawford, 2011). When this is done, the banks can again normalise the lending rates for property loans to increase the purchasing power of the buyers of the property. In this way equilibrium can be achieved in terms of price and demand.
8. People moving to Australia looking for jobs- If people outside Australia come in for jobs, there is possibility that the house rents will increase. The demand for accommodation will increase at a significant rate. If there is equal amount of supply, then the price will not increase much. However if the supply does not match with the demand, the house developers will be forced to increase the price of the houses (Costello et al., 2011). Unless the government intervenes in the demand and supply situation, there will be continued increase of demand and lack of supply. In future the job seekers might be forced to go out of Australia as there will be lack of housing supply. Hence government has to regulate the difference with the help of appropriate interventions.
9. Investment companies and their impact on Australian Housing market- When investment companies from foreign companies come to Australia, there will be stiff competition to the Australian housing industry (Demary, 2010). The housing rates will decline. The banks will provide lower rates of interests of borrowing to the purchasers of the property. Since the supply will be high, it will impact the profits and cut offs of the sellers. However the buyers will have greater options of choosing which house to invest in. They will not be forced to accept the earlier high prices of the local developers. The market will become perfectly competitive. This will reduce the instances of exploitation of the potential buyers. The prices of the houses will become more affordable.

When speaking about supply it refers to the intent of the seller to distribute goods and services at a specific price and time. The relation between amount supplied and price is shown by the supply curve (Milligan and Pinnegar, 2010). There is direct relation between amount supplied and price of the goods. When price increases, the seller will wish to provide more goods and services and vice versa.

When referring to aggregate supply with respect to housing market, it is the houses that the builders want to supply to the market at prevailing rates. The diagram displays price and houses supplied.

1. Increase of profit from new houses

The gain received is based on the demand and price of the houses. If the demand and the price of the houses increase, the builders will wish to make more homes. The reverse will occur if the prices are low.

2. Local’s outlook with respect to developinghomes

The local public support act as an important factor for the construction of houses in the locality (Arnold, 2008). If the local residents oppose to the development, the supply is bound to fall. Thus there should be proper education provided to the local residents with the help of community meetings and seminars where they can access to a blueprint of the plan (Beer et al., 2007). They should be given access to housing schemes and loans to encourage them to buy the new houses. Without sufficient support and help it is not possible to derive support.

3. Land regulations

Regulations implemented by the government will affect land utilisation in an area. On the basis of the regulation the houses will be developed. There is a clear relationship between planning policies and the supply of land. With the help of proper policies, houses can be built which will be able to lower the consumption of energy, reduce the size of the houses. This will increase utility and more number of houses can be built (Chapman, 2006). The areas and suburbs should be provided with more public transport facilities so that they use their private cars much less. This will ensure that the extra car parking spaces can be utilised to build more houses. The impact of the high net housing densities and Urban Growth Boundaries has slowed down the growth of urban areas into the country side which has eventually cut down the expenses of travelling. Thus the aspect of these factors has always been a matter of debate leading to increase in supply.

Equilibrium price is denoted by P* and the equilibrium quantity by Q*. When equilibrium is achieved there will be parity between supply and demand.

The affordability of houses is dependent on the income of the households and the expenditure pertaining to houses with respect to rents, mortgage rates and prices (Whitehead and Williams, 2011). Affordable housing differs from house affordability as it refers to low income houses and social housing. There can be increase in the supply of affordable housing for meeting the long term and medium term demands with the help of investments by large corporations in the affordable houses of the residential market.

6. People buying in investment properties- People tend to invest in properties when the rates of interest of the banks are low. People have more purchasing power and they demand more for new houses. They already invest in future properties (Mack and Martínez-García, 2011). If the property developers already have sources of finance, they will be able to meet the present levels of demand. However if the property developers are not able to derive sufficient sources of finance to complete the orders placed by the buyers, there is possibility of a creation of rift between demand and supply. Thus the government and Reserve Bank of Australia must take regulatory measures to ensure that the rates of interests are increased substantially for a short period of time to assist the housing developers (Favilukis et al., 2012). If the rates of interests are increased, the purchasing power of the potential property buyers will reduce. Moreover they can offer housing development loans to the developers of the property to ensure that they are able to finish their commitments within time. These measures will enable equilibrium to be achieved in terms of supply of houses and prices.
7. Influence of job immigrants on the supply of housing- In case there is influx of large number of job immigrants into the country, there will be more pressure on the property developers to supply new houses to these people (Forrest, 2013). Small housing developers will be more benefitted by this phenomenon because these new immigrants will require inexpensive dwellings. Moreover the demand for rented flats and paying guest accommodations will increase. If the supply is already high, there will be no possible impact on the price of the houses. However, if the supply is less as compared to demand the prices of the present flats and apartments will be high. If they are bought, the developers will be able to reap great profits (Duca et al., 2010). However if the increased prices become beyond the purchasing power of the immigrants there will be a demand and supply situation. The government has to interfere in this situation by reducing rates of interest for housing loans to the present consumers.
8. Impact of foreign investors on supply in the Australian housing market- When more foreign investment enters into the Australian market, the competition for developers will increase significantly. The supply of houses will increase drastically. This will lead to prices of houses and house rents to decrease (Diamond and Tolley, 2013). The new investors will be able to make high profits in the short run. However as the demand for houses will normalise, the super normal profits will go down. Thus the marginal profits will fluctuate in the long run.

As per OECD, the 1980-2015 prices to income ratio index showed an increase to the tune of 78%. This shows that affordability of the houses had reduced over a period of time. According to the study, there was 75% hike in the prices of the Australian houses with respect to the earning of the households (Caldera and Johansson, 2013).  With the house price hike, the aggregate spending increased from 12.8% to 18%. This allowed households to invest their money for more luxurious homes located in posh localities ("Housing affordability in Australia – Parliament of Australia", 2017). When looking at the contents of the policies pertaining to house affordability, there are two important ways by which house affordability can be measured. One is by residual measures and another by ratio measures. The concept of ratio measures deal with the connection between expenses regarding houses such as costs and prices and the earnings of the households (Bentley et al., 2011). The relationship is either in the form of a mean or a median. These ratio measures are published by different housing market organisations, the ABS and the OECD. The residual measures take into account the capability of the households to have a proper living standard after bearing the costs of housing. Due to the degree of complications involved in calculating the residual measures, they are done mostly by the academicians and the researchers.

There is a concept of housing stress. It is a situation faced by a household if they spend in excess of 30% of their earning for costs borne with respect to their houses. The households who usually have high income are often not taken into consideration for making this analysis, as they have the ability to spend a higher portion of their earnings for bearing the costs of the houses without encountering any significant issues (Mason et al., 2013). Hence there is a benchmark ratio which is used to understand this concept. Thus those households can be considered to be in housing stress if they belong to the last 40% in terms of income and pay in excess of 30% for the costs borne on housing. However both net and gross incomes are used by researchers for determining housing stress.

The government in the year 2016 announced the formation of a working group on affordable housing with the aid of the Council on Federal Financial Relations (Meen, 2012). This body will devise ways to find affordable houses for low income people.

Private and public organisations should invest to increase the supply of affordable houses to cater long and medium term demand (Kelly et al., 2011).

There are issue regarding low interest of investors pertaining to building of affordable houses (Murray and Dainty, 2013). If the investors are enthusiastic, the problem of affordable houses will be resolved. The reason behind the reluctance of the investors is because they think that the concept of affordable housing carries huge risk and it provides substantially low returns on investment (Yates and Michelle, 2006). The disinterest of the investors can only be removed if the government gives out subsidies and incentives. Moreover if the government introduces some kind of financial instrument like the National Rent Affordability Scheme, the investors would be greatly encouraged.

Conclusion

The HIA may utilise this knowledge to determine market prices appeasing both the developers and the households and making sure the affordability of the houses. The government also needs to come up with sound policies for cushioning investors against the fluctuations in the prices. Currently the demand for houses in Australia is higher compared to the available supply of houses.

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