Understanding The High House Prices In Australia's Housing Market Essay.

1)Explain the basic microeconomic and macroeconomic concepts

2)Discuss the micro and macroeconomic environment’s effect on business activities in the economy

3)Identify current economic issues, both domestic and international

4)Apply economic concepts and models to a range of economic issues and explain their use

Basic Microeconomic and Macroeconomic Concepts

For some time now, Sydney and Melbourne have been experiencing a housing bubble. The housing market in Australia has been exhibiting substantial increases in the price of houses. Notably, houses in Melbourne and Sydney are significantly overpriced, making it difficult for most households to afford decent housing (Collyer, 2016). It is imperative to note that some economists argue that the high prices are a result of inadequate supply of houses in the country, which leads to shortages. Others argue that that the high prices are a consequence of too many immigrants moving into Australia thereby increasing competition for houses. Essentially, one may propose that the high house prices are a consequence of a combination of factors in the Australian economy.

Predominantly, the high house prices in the country have emerged due to a series of factors in the economy. For starters, the financial deregulation in the country increased the accessibility of credit to the Australian households. As such, it permitted a greater availability of credit to the households in the country. In turn, this increased the available income and money supply in the economy to purchase housing units in the cities. Consequently, the increased demand for houses and apartments in the city amidst a constant supply created an upward pressure on prices. Eventually, the price of houses and apartments in the two cities rose significantly.

In addition to this, the historically low interest rates have also led to the rising housing prices in the two cities. Since 2008, the country’s level of interest rates on mortgage loans has been substantially low. For this reason, the borrowing capacity in the two cities has increased (Holt, 2009). Mainly, one can attribute this to the fact that households can now afford to pay back the loans at lower repayment rates. In turn, this has increased the level of loan disbursements for purposes of acquiring homes. In turn, this has increased the demand for housing units, thus pushing up the prices of houses in Sydney and Melbourne.

Furthermore, one may attribute the high house prices to the prevailing government policies on land use. More specifically, the Australian government limits the release of new land for development (Collyer, 2016). Hence, this has significantly reduced the supply of land for constructing dwelling units in the two cities. Apart from that, the government has also set restraints on the usage of land, thereby preventing construction of houses. Besides, it has set policies that restrict Greenfield developments in Melbourne and Sydney which are designed to encourage urban densification.  Consequently, these factors have significantly reduced the availability of land for construction of dwelling units in the country, hence creating pressure on the available supply. Subsequently, this results in high prices for houses and apartments.

In addition, the government relaxed the legislation rules for foreign buyers in the Australian housing market. As a result, many foreign investors have purchased land and built houses in Melbourne and Sydney (Verrender, 2015). Unfortunately, most of these houses and apartments are not rented out to the Australian people and remain vacant since many foreign investors are after capital growth. For this reason, foreign investment on residential property in the country has significantly suppressed the availability of houses for the residents of Melbourne and Sydney (Law, 2014). In turn, this has created an upward pressure on the available supply of houses, leading to high housing prices.

Micro and Macroeconomic Environment's Effect on Business Activities in the Economy

It is imperative also to point out that the two cities are highly populated. Mainly, individuals from the rural areas move into Melbourne and Sydney. Thus, the rural to urban migration has significantly increased the number of people looking for houses within the city. Consequently, this has increased the demand for housing units in the two cities. Besides, there are many immigrants who move to Australia and settle in Sydney and Melbourne. Typically, this increases the demand for dwelling units, yet supply is fixed over the short run. As a result, they compete with the residents for houses and apartments, pushing up the house prices.

One may also argue that the average floor area of houses in the two cities and Australia as a whole has increased over the years.  More specifically, many households in the city have adopted a luxurious lifestyle that calls for bigger houses. As a result, construction companies are shifting from building many house units within a given piece of land to constructing bigger houses and apartments. In turn, this has significantly reduced the supply of houses and apartments in Melbourne and Sydney. For this reason, the reduced supply amidst a continuously growing demand for houses has created pressure on the available houses, leading to high prices.

As noted above, the prices of houses in Australia are very high. In this regard, it is crucial that the federal government and local government must instigate and implement various measures to contain and reduce the prices of houses to affordable levels. Otherwise, the continued increase in the price of houses in Sydney and Melbourne will render many households homeless due to the lack of enough financial resources to purchase or rent decent housing units within the city. Notably, various measures may be applied.

For starters, the government should strive to increase the supply of houses in the two cities. Predominantly, this can be done through extending funds and grants to construction companies. It may also subsidize the prices for construction materials in the country. In turn, this will substantially reduce the costs of building. By and large, a reduction in the cost of constructing apartments and houses will translate to a reduction in the prices charged by firms for houses. Besides, reduced costs will enable firms to build more houses, thereby increasing their supply. Eventually, this will drive down the prices for houses in the country.

Furthermore, the government should invest more in public housing within the two cities and the rest of the country as well. Primarily, it should avail more funds for the construction of public housing and affordable dwelling units within the two cities. Markedly, this role should be undertaken by the Department of Affordable Home Schemes (Dalzell, 2016). Predominantly, this will increase the supply of houses in the cities. By doing so, the low and moderate income earners living within the city will be able to access more affordable houses. Consequently, this will relax the pressure on the available housing units, thereby causing a decline in the prices of houses and apartments in Sydney and Melbourne.

Current Economic Issues, Both Domestic and International

Typically, home ownership is one of the main dreams and aspirations of many households. However, the prevailing conditions in the Australian housing market may make it impossible for young professionals to afford decent houses within Melbourne and Sydney. Regardless, homeownership may still be a viable dream for many individuals who wish to own apartments and homes in the region. Mainly, this can be done through various schemes, obtaining loans, and mortgages, among others.

Firstly, a potential homeowner may apply for a Shared Home Ownership scheme. Essentially, this scheme allows Australians to purchase homes with the help of the country’s Department of Housing (Dalzell, 2016). In this case, the individual obtains a SharedStart loan from the government’s lending provider. Noteworthy, the initial cost of purchasing a home is reduced significantly, thereby allowing the individual to become a home owner. Although the government retains up to 30 percent ownership of the property, the individual has the option of purchasing the full amount when he or she has enough funds. Thus, using this scheme, the young professional may be able to afford a decent home at the existing high prices.

Likewise, the young professional may apply for a first home owner grant. Mainly, individuals seeking to purchase homes in Australia for the first time are eligible for grants from the government (Office of State Revenue, 2017). Therefore, this provides a significant opportunity for the individual to obtain funds from the government and top up with the available savings to obtain a decent home within the cities.

Besides that, the young professional may apply for a mortgage loan from relevant banks and financial institutions within the country. Given that the interest rates are fairly low and the terms of repayment are favorable, the individual may easily access the funds to buy a home and repay later. This way, he or she will become a homeowner.

Conclusion

All in all, all factors considered, the Australian housing market is experiencing a significant bubble. Essentially, the bubble has been caused by factors such as increased accessibility of credit, low-interest rates, government restrictions on land use, and increased population. Cumulatively, these factors have significantly contributed to the high prices of houses in Melbourne and Sydney. In order to control this, the government may provide subsidies and grants to construction companies and invest in public housing within the two cities. Despite the high prices of houses in Sydney and Melbourne, a young individual may afford to buy a home by obtaining a mortgage loan, first home owner grant or take a Shared Home Ownership Scheme.   

Reference List

Collyer, D. (2016). Australia’s housing bubble and the road to private serfdom. [Online] Prosper. Available at: https://www.prosper.org.au/2016/04/12/australias-housing-bubble-and-the-road-to-private-serfdom/ [Accessed 14 Mar. 2017].

Dalzell, S. (2016). Push for shared home ownership scheme in NSW to help those locked out of the market. [Online] ABC. Available at: https://www.abc.net.au/news/2016-07-27/calls-for-nsw-shared-home-ownership-scheme-to-be-introduced/7666232 [Accessed 14 Mar. 2017].

First Home Owner Grant (New Homes) Scheme. (2017). [Online] Office of State Revenue. Available at: https://www.osr.nsw.gov.au/grants/fhog [Accessed 14 Mar. 2017].

Holt, J 2009, ‘A Summary of the Primary Causes of the Housing Bubble and the Resulting Credit Crisis: A Non-Technical Paper, Journal of Business Inquiry, vol. 8, no. 1, pp. 120-125.

Law, J. (2016). Housing affordability: Are foreign investors to blame for Australia’s high property prices. [Online] News.com. Available at:  https://www.news.com.au/finance/real-estate/buying/housing-affordability-are-foreign-investors-to-blame-for-australias-high-property-prices/news-story/710ba2cff1932f0fb3f81ce83a07946b [Accessed 14 Mar. 2017].

Verrender, I. (2016). Who's the real culprit behind soaring house prices? (Hint: it's not Chinese buyers). [Online] ABC. Available at https://www.abc.net.au/news/2015-06-08/verrender-whos-the-real-culprit-behind-soaring-house-prices/6528710 [Accessed 14 Mar. 2017].