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Housing Market Failure In Economy

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Question:

Discuss about the Housing Market Failure in Economy.
 
 

Answer:

Introduction:

The article “RBA governor Philip Lowe only sees one way to solve Australia's housing affordability problem” by David Scutt on April 5th, 2017 shows the imbalances between demand and supply of homes in the main Australian cities. The demand for houses overshadows the supply resulting in shortages and high prices. Underinvestment in the housing sector is significantly impeding the provision of homes and hence scarcity. There are also demand-side factors that have contributed to this situation. For instance, the cities have encountered population increase thus leading to an increase in demand for houses. Low cost of borrowing, availability of credits and investor activity are other factors that have contributed to an increase in the demand for homes in Australia (Scutt 2017).

The primary concern arising from this situation is the increase in the affordability crisis. The recent increase in the house prices has made it hard for low and mid-income households to secure dwellings in the key cities. Foremost, there are proposals that the government should develop infrastructure to increase the availability of suitably located land to enhance the delivery of additional houses. The state is argued to reduce immigration levels and also limit tax concessions to check on the rising demand (Scutt 2017).

The article “Sydney squeeze: Is rent control the answer to the housing affordability crisis?” by Amanda Hoh portrays failure in Australian real estate market. Both rents and the prices of purchasing homes have increased considerably making it difficult for Australians to secure dwellings.  The measures towards ensuring house affordability seem to be concentrated only on affordable buying. The author argues that both affordable acquisition and affordable renting should be given equal weight in addressing housing issues (Hoh 2017). Introducing rent ceiling will be essential to protecting the low-income families in the society.

The underinvestment in the housing sector is among the leading factors in hindering the development of additional houses in Australia. Inadequate infrastructure discourages the property developers from constructing new homes (Gurran & Phibbs 2013, p. 384). In a situation where the developers incur the cost of core infrastructures like roads and water, such expenses are passed to the purchasers through higher prices.

The main cities in Australia like Melbourne and Sydney have been encountering population increase in the recent years. A large number of individuals in towns results in strong demand for dwelling units. As the demand for housing has been increasing, the supply has not grown to respond to the demand and hence increase in the prices (McLaren, Yeo & Sweet 2016, p. 47).

In the past one decade, Australia has been experiencing positive economic growths and rising GDP per capita. With such positive increases, the incomes of city dwellers have improved significantly (McLaren, Yeo & Sweet 2016, p. 50). Therefore, the residents have increased their demand for homes a scenario that has led to high prices since the supply has not caught up with demand. 

 

Addressing the Issue of Housing Affordability

Australia is known to be having one of stringent land utilization policies across the globe. These systems contribute considerably to underprovision of dwelling units in the cities as they act as a discouragement to the developers. For example, they result in compliance costs which the developers tend to pass to the first home buyers (Haslam McKenzie & Rowley 2013, p. 375). Therefore, relaxing these policies can pave the way for construction of more homes to check on the rising demand.

The command should take an active role in the improving the infrastructure in the country. Equitable and sufficient development of core infrastructures like water, sewerage, roads, and energy can increase the supply of well-located land to facilitate the building of new homes (Davidson 2016, p. 37). Availability of better infrastructure will also bar the developers from passing the costs associated with the infrastructure to the first home purchasers.

The investor activity which is partly encouraged by the provision of tax concessions by the government has helped to pile pressure on the limited houses (Gurran & Phibbs 2013, p. 400). Therefore, the leadership should consider restricting the tax concessions to reduce investor demand and speculative activities in the market. Moreover, limiting immigration levels will help to calm city populations and hence less demand for homes.

As the income of city dwellers increases, their demand to own houses also grows. On the graph one below, this scenario is demonstrated by the shift in the demand curve from D1 to D2. The change in demand curve causes the quantity demanded to increase from Q1 to Q2 while the prices grow to P2.

Before the introduction of rent ceiling, equilibrium in the real estate market is achieved at point K where the equilibrium price is Pe, and the equilibrium quantity is Qe. The introduction of rent ceiling, that is, P1, leads to change in both the number of homes demanded and those the suppliers are will to deliver. The number of homes required increases to Q1 while those landlords are willing to supply reduces to Q2. The difference between Q1 and Q2 shows the scarcity of rentals in the market. Rent cap reduces the rents, and thus those renters who can secure houses will benefit. However, in the long run, the rent regulation policies backfires as the landlords supply less in the market leading to a shortage. The welfare of the renters and owners declines significantly.

Before rent ceiling, the consumer surplus is represented by the area MKPe, which reduces to the area marked X after the rent cap is imposed. On the other hand, the primary landlord surplus is denoted by area JKPe which declines to portion marked Y on the imposition of rent regulation. As a result, dead weight loss sets in, that is, the loss that arises because the consumer cannot find a house to rent and also the landlords loses income by not supplying homes to the market. On the graph two above, the deadweight loss is shown by the portion marked D.

High level of immigration in urban centers results in an increase in demand for dwellings. Therefore, if the government puts measures in place, it can help reduce the demand arising from population pressure. For example, the leadership can improve infrastructure and other social amenities in rural areas to reduce rural-urban migration. Reduction in population will reduce the demand for houses and hence the demand curve shift leftward towards the equilibrium.

Provision of Additional Rental Units

Insufficient supply of rental homes contributes to high rental prices considerably. Therefore, instead of concentrating on rent regulation, the government should strive to increase the supply of rental units in the market. For example, the leadership can work with charitable institutions involved in the development of affordable houses to increase the supply. As the supply increases, the prices will decline.

Rent control is known to weaken the quality of rental stock. Rent ceiling reduces the rents the landlords get from renting out houses. The policy bars the producers from passing the costs of maintaining the rooms to the consumers. As a result, the owners will not renovate and preserve the homes since they will have to incur costs themselves. When they cease to renovate the homes, then the quality reduces significantly.

 

Bibliography

Davidson, NM 2016, Affordable housing and public-private partnerships, Routledge.

Gurran, N & Phibbs, P 2013, 'Housing supply and urban planning reform: the recent Australian experience, 2003–2012', International Journal of Housing Policy, vol 13, no. 4, pp. 381-407.

Haslam McKenzie, FM & Rowley, S 2013, 'Housing Market Failure in a Booming Economy', Housing Studies, pp. 373-388.

Hoh, A 2017, Sydney squeeze: Is rent control the answer to the housing affordability crisis?, viewed 18th April 2017, <https://www.abc.net.au/news/2017-03-21/sydney-squeeze-affordable-housing-rent-control-options/8370364>.

McLaren, J, Yeo, A & Sweet, M 2016, 'Australia is Facing a Housing Affordability Crisis: Is the Solution to this Problem the Singapore Model of Housing? ', Australasian Accounting Business & Finance Journal, vol 10, no. 4, pp. 38-57.

Scutt, D 2017, RBA governor Philip Lowe only sees one way to solve Australia's housing, viewed 30th April 2017, <https://www.businessinsider.com.au/lowe-housing-affordability-2017-4>.

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