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MAE10-Issues Related To Property Market In Vancouver

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  • Course Code: MAE101
  • University: Deakin Business School
  • Country: Australia

Questions:

1.What is the main problem in Vancouver’s property market that the above article is referring to?
 
2.Using the above article, identify the demand and supply side factors that might be contributing to creating or worsening the problem in Vancouver’s property market.
 
3.(i) The article alludes to two types of buyers of property: “owner-occupiers” (that is, those intending to buy to occupy) and “investors” (that is, those buying for investment purposes including overseas investors). On a diagram, show both types of demand curves and use them to get a market demand curve for property. Briefly explain your work.
 
(ii) What policy measures are being proposed by the recently elected British Columbian government to manage housing demand? Which type of demand will be most affected by this policy, how and what will be its impact on the market demand curve? [Note: you don’t need to do diagrammatic work for this part.]
 
(iii) Using a supply-demand diagram for the property market, show the combined impact of such demand management policies on the property market equilibrium and explain your work. Use your Page 6 of 7 work to also comment on how such policies help towards rectifying the main problem in Vancouver’s property market. 
 
4.How will the elasticity of supply influence the impact of demand management policies (as explored in question 3 (iii)) on the property market? Support your answer using an appropriate supply - demand diagram.
 
5.What impact might the introduction of a tax on empty homes have on the rental market in Vancouver? Illustrate using a supply - demand diagram.
 
6.Discuss whether factors similar to Vancouver have also been at play in the property market of large Australian capital cities like Melbourne or Sydney. Briefly describe two policy options being implemented, recommended or debated in Australia in this context. For each such policy option, state and explain which side of the market (supply or demand) the policy would impact and how. Also predict the policy’s likely impact on property prices. Support your answers by referencing relevant facts and points of view from at least two sources. 

 

Answers:

1.The given article has discussed about some present issues related to property market in Vancouver. According to this, prices in the property market have increased significantly and this, in turn, has generated trouble among citizens to purchase or rent new houses. For instance, young people have faced difficulties to afford rents in Vancouver at the starting phase of their career (Www-theage-com-au.ezproxy-f.deakin.edu.au. 2018). This consequence has affected most of the people to purchase new houses or property in the city.

To deal with this present critical situation and future probability regarding increasing prices of houses, most of the citizens and homeowners of this city want a housing price reduction by minimum 30% for coming years. This price fall may cause a reduction in the property value in future. However, according to them, this price fall can secure their future generations from experiencing expensive housing and property market further (Hoolachan, McKee, Moore and Soaita 2017). According to the Real Estate Board of Greater Vancouver, prices for home and condominium have been increased up to 16% since last year and up to 60% since last three years. Some main reasons that stimulate the demand for houses in Vancouver are the natural beauty along with temperature climate of the city and liberal immigration policies of Canada.

2.The worsen situation in the property market of Vancouver can be analysed with the help of demand and supply factors, extracted from the mentioned article. The chief reason for analysing these factors is to understand that whether increasing demand for and insufficient supply of houses can lead the prices of this property to increase further or not (Hiebert 2017). These basic factors related to demand and supply are discussed below:

Factors affecting demand side:

The number of population in Canada has increased significantly over the year and consequently, demands for housing properties and residences have started to rise considerably (Goodman and Mayer 2018). As a result, affordability crisis within the property market has increased significantly.

People of Australia and the USA consider residential property markets as a profitable source of investment to make money during long-term (Desmond 2018). Thus, many people have invested their money in the housing market of Vancouver to gain higher amount of revenues in future. Hence, this trend leads the demand for houses to increases further.

Natural beauty of Vancouver attracts both domestic and international buyers, especially people of China to purchase houses within the city. The government increases foreign-buyer tax for British Columbia from 15% to 20% on purchasing price of a home (Www-theage-com-au.ezproxy-f.deakin.edu.au. 2018). Moreover, the government intends to impose property taxes by large amount on purchasing the second home when the earning person of the family come from oversees or possesses homes valued more than USD 2.3million (). This makes the housing market demand more dynamic through increasing the housing prices further.

The amount of income tax in British Columbia is comparatively high than that property tax. Hence, people invest large amount of money in property market and this further lead the demand for houses to increase by large magnitude. 

 

Factors affecting supply side:

The housing stock in Vancouver has increased by 12% over the last few years while the percentage of population in this city has increased by 9% during the same period (Bardwell et al. 2018). However, this increasing supply cannot reduce the excess housing demand in property market due to inflow of foreign capital by large amount and other Canadians, who live outside the country.

The strict laws regarding zoning has objectives to keep a large portion of Vancouver, as low-density of the city government reserve maximum area of this city for residing single-family (Geng 2018). This further helps the government to meet its objective related to low-density zone and consequently the housing prices increase in the city due to restricted supply of houses.

Vancouver has the potentiality to generate large employment opportunity though the region provides comparatively low wages than other parts of the USA (Zwick 2018). This, in turn, creates trouble among people to afford or rent a house.

Hence, all demand and supply side factors related to property market discussed above have forced the housing prices to increase significantly.

3(i)The specified article has stated about two types of property buyers, viz. owner-occupiers and investors. For the first type of buyers, house can be represented as a necessary commodity. This is because those buyers purchase houses for living purpose, as they do not have any other alternatives to stay. On the contrary, second type of buyers can consider housing property as luxury goods from where they invest money to earn revenue in return (Head and Lloyd?Ellis 2016). Thus, for owner-occupiers, the demand curve for housing properties will be less elastic compare to that for investors. From these two distinct demand curves, a market demand curve for houses can be obtained. The following diagram is based on demand law, where price and quantity demanded for a product has negative relationship. This means, higher price tends the demand for a product to decrease further while the opposite situation also occurs when price increase. The market demand curve is the sum total of individual demand curves. Hence, the slope of market demand curve is influenced by the individual demand curves.

Figure 1: Market demand curve from individual demand curves

Source: (created by author)

In the above figure, individual demand curve for homeowners, investors are represented by D1 and D2, respectively while D1 is steeper compare to D2. These two curves together construct the market demand curve, D. As, price increases from P0 to P1, demand for housing can reduce by less magnitude for homeowners compare to that for investors.

ii)The British Columbian government, which has been elected recently in Vancouver, has intended to increase the tax of foreign buyers in the city’s housing market from 15% to 20% on the purchasing price of houses (Lougheed, Metuzals and Hird 2018). Furthermore, the government has planned to enhance the property taxes for those families, who aim to purchase second homes, while the main source of income for these houses are coming from abroad and those, who have values more than 3 million Canadian dollar (Filipowicz, Clemens and Lau 2017). The government also imposes taxes on empty houses.

Through imposing these housing policies, the Columbian government chiefly focuses on demand for investment for houses that are prevailing in property market of Vancouver. The demand elasticity for these houses is high compare to the demand elasticity for living in these houses. Hence, it can be concluded that a small increase in price for houses after imposition of government policy can reduce the demand for houses within the market by large extend. The fall in housing prices is the desired outcome of the government.

iii)The above-discussed demand management policies related to the property market of Vancouver can establish market equilibrium with the help of supply-demand diagram. This can be represented in the following diagram:

Figure 2: Change in demand for houses due to management policies

Source: (created by author)

Through implementing demand management policies, the demand for houses in Vancouver can be decreased further. The demand is coming from foreign investors and Canadian people, who are trying to purchase second homes with some criteria. As a result, the demand curve shifts from D0 to D1 indicating that the amount of housing demand also decreases from Q0 to Q1. Consequently, housing-prices also reduce from P0 to P1. Hence, with the help of above diagram it can be said that affordability crisis in Vancouver due to increasing houses prices can be reduced with the help of these management policies.

4.The supply elasticity can influence the impact of demand management policies imposed by the government of Vancouver in the housing market by large extend (Filipowicz, Clemens and Lau 2017). This implication can be represented with the following diagram.

Figure 3: Changing impact due to different supply elasticity

Source: (created by author)

In above figure, S represents supply curve that has higher elasticity compare to S1. Higher elasticity implies that decrease in price can reduce the supply accordingly and consequently the number of houses can decrease significantly, from Q0 to Q1. As a result, price falls from P0 to P1. On the other side, for comparatively less elastic supply curve S1, a significant fall in housing prices from P0 to P2 cannot decrease the supply by large extend. Hence, the impact of demand management policies is depended completely on the supply elasticity, as after imposition of these policies, demand for houses can reduce by Q0Q2 amount only, while price decreases by large extend (Glaeser and Gyourko 2018). This outcome can reduce the property market crisis in Vancouver, significantly.

5.Through imposing a tax on empty homes, the government of Vancouver has intended to influence the rental market in the city, significantly. For this tax, the owners of empty homes decide to rent the same for people searching for rented homes (Martin et al.2017). Consequently, the supply of rented houses can increase in the property market, this further can decrease the renting prices in Vancouver, and the phenomenon is shown in following diagram:

Figure 4: Increase in supply due to imposition of empty home tax

Source: (created by author)

In above figure, supply of rented homes increases from Q0 to Q1while demand for it remains at D0 level. As a result, rent of houses in this city decreases from P0 to P1. This phenomenon further can assist young people and others to afford rental homes in future compare to present situation.

6.The affordability issue in the property market of Vancouver can be represented as similar as it in the housing market of Sydney and Melbourne of Australia. In these cities, demand for houses increases at a higher proportion compare to its supply and this in turn, increases the prices of the residential properties at large extend. The economic importance of these two cities is similar with that of Vancouver. People in Australia intend to purchase to take rent mainly in these Sydney and Melbourne due to higher amount of employment opportunities and other facilities. The number of immigrated people in this country is increasing significantly, as people in Australia due for seeking jobs or pursuing their education. For this, the Australian government has imposed various policies to control the growing issues related to the property market. Some of these policies can be described as follow:

Grant for first homeowner:

The Australian government supports the view of state government for providing financial assistance and supports to those people, who aim to purchase their homes for the first time. The scheme, funded by the country’s federal government, has come into action since 2000 to stimulate the affordability of buyers for the first time. However, this policy has some disadvantages as well (Wood, Smith, Cigdem and Ong 2017). As the affordability of homeowner’s affordability to purchase new houses increase, the demand for houses also increases while supply of houses increases at a slower rate. This, in turn, increases the prices for houses in the property market by large extend and consequently, the crisis regarding affordability of houses in property market increases significantly. However, the government is trying to improve this situation by implementing new policies.

National Rental Affordability Scheme:

This policy has been implemented in 2008 to increase the supply of rental houses for reducing the rental rates and increasing the affordability of houses in the property market. This policy supplies annual incentives to homeowners to take rent for ten years. The amount of rent, charged by the government, is 20% low than the equilibrium rates that exists in the market of housing rental in the country (Power 2017). The chief focus of this policy is to increase the housing supply for renting to people, who are seeking for houses to take rent. 

 

References:

Bardwell, G., Fleming, T., Collins, A.B., Boyd, J. and McNeil, R., 2018. Addressing Intersecting Housing and Overdose Crises in Vancouver, Canada: Opportunities and Challenges from a Tenant-Led Overdose Response Intervention in Single Room Occupancy Hotels. Journal of Urban Health, pp.1-9.

Desmond, M., 2018. Heavy is the house: Rent burden among the American Urban Poor. International Journal of Urban and Regional Research, 42(1), pp.160-170.

Filipowicz, J., Clemens, J. and Lau, M., 2017. Interest Rates and Mortgage Borrowing Power in Canada. Fraser Institute.

Filipowicz, J., Clemens, J. and Lau, M., 2017. Interest Rates and Mortgage Borrowing Power in Canada. Fraser Institute.

Geng, M.N., 2018. Fundamental Drivers of House Prices in Advanced Economies. International Monetary Fund.

Glaeser, E. and Gyourko, J., 2018. The economic implications of housing supply. Journal of Economic Perspectives, 32(1), pp.3-30.

Goodman, L.S. and Mayer, C., 2018. Homeownership and the American Dream. Journal of Economic Perspectives, 32(1), pp.31-58.

Head, A. and Lloyd?Ellis, H., 2016. Has Canadian house price growth been excessive?. Canadian Journal of Economics/Revue canadienne d'économique, 49(4), pp.1367-1400.

Hiebert, D., 2017. Immigrants and Refugees in the Housing Markets of Montreal, Toronto and Vancouver, 2011. Canadian Journal of Urban Research, 26(2), pp.52-78.

Hoolachan, J., McKee, K., Moore, T. and Soaita, A.M., 2017. ‘Generation rent’and the ability to ‘settle down’: economic and geographical variation in young people’s housing transitions. Journal of Youth Studies, 20(1), pp.63-78.

Lougheed, S.C., Metuzals, J. and Hird, M.J., 2018. Modes of governing Canadian waste management: a case study of Metro Vancouver’s energy-from-waste controversy. Journal of Environmental Policy & Planning, 20(2), pp.170-182.

Martin, H., Whitaker, S.D., Oduro, I., Johnson, É., Richter, F.G.C. and Urban, A.H., 2017, June. Predictive Modeling of Surveyed Property Conditions and Vacancy. In Proceedings of the 18th Annual International Conference on Digital Government Research (pp. 358-367). ACM.

Power, E.R., 2017. Housing, home ownership and the governance of ageing. The Geographical Journal, 183(3), pp.233-246.

Wood, G.A., Smith, S.J., Cigdem, M. and Ong, R., 2017. Life on the edge: a perspective on precarious home ownership in Australia and the UK. International Journal of Housing Policy, 17(2), pp.201-226.

Www-theage-com-au.ezproxy-f.deakin.edu.au. 2018. Shibboleth Authentication Request. [online] Available at: https://www-theage-com-au.ezproxy-f.deakin.edu.au/world/north-america/in-vancouver-a-housing-frenzy-that-even-homeowners-want-to-rein-in-20180603-p4zj62.html [Accessed 19 Aug. 2018].

Zwick, A., 2018. The Public Finance Challenges of Fracking for Local Governments in the United States. Institute on Municipal Finance and Governance.

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