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Current Affairs and Influential Economy

Question:

Discuss about the Current Affairs and Influential Economy.

Answer:

Introduction

The Australian economy, being one of the strongest and most influential economy across the global scenario over the last few decades, has developed consistently and impressively, showing highly robust growth trends in all its economic and other growth indicators. The booming economy along with the growing industrial, service and commercial sectors have attracted huge number of people from all parts of the world to migrate into the country over the years, in search of economic prospects, better employment and a better life as a whole (Butlin 2013).

This huge inflow of population as well as the domestic increase in the population of the country has led to the creation of an increased demand for residential properties in the country, especially in the highly developed and economically prospering metropolitan and urban areas like that of Sydney, Melbourne and other cities in the country, thereby creating an upward pressure on the prices of the housing properties in the country as a whole and especially in these urban areas.

Keeping this into context, the concerned report refers to the news article named, “More housing hasn’t fixed Australia’s affordability crisis. It’s time for a national settlement strategy”, by John Brockhoff, published on 28th April, 2018, which tries to highlight whether the steps taken by the government of the country, of that of increasing the supply of housing in the country actually helped in decreasing the prices of the housing assets in the country and also highlights the possible way outs to the problem of housing affordability crisis which has been created in the country in the recent times (Thefifthestate.com.au 2018).

Essence of the Article

The article shows that in the recent periods the country has seen huge growth in the supply of housings, the numbers being even more than the other globally eminent cities like London and New York. It also highlights the future projection of an additional 725,000 dwellings in Sydney by 2036 and nearly 1.6 million of houses in Melbourne by 2050 (Wadud, Bashar and Ahmed 2012).

The article however does not view the increase in the supply of housing in the country to be credible enough in bringing the price of the assets down in the near future. The possible reasons which the article puts forward for the failure of the supply side initiative in the housing sector of Australia is attributed to the different supports, especially financial ones which include the schemes like the First Home Owners Schemes as well as the tax cuts and low rate of interests in borrowing for buying homes, which in turn has led to an increase in the interest among the population to buy homes in the country, especially in the cities, thereby keeping the upward pressure of demand and price intact (Randolph, Pinnegar and Tice  2013).

The article highlights the problem of especially the low income or middle-income classes whose affordability has not increased at all in the aspects of owing houses in spite of the presence of an impressively increasing supply of housing, attributing the problem to the simultaneous increase in the demand for the same, fuelled by the government schemes. The article ends up by recommending spatial strategic planning in order to improve the number as well as the suitability of the houses which are in demand as well as by building houses at the places where the demand is high (Lee and Reed 2014). The article also emphasizes on proper allocation of planning and investment so as to bring down the overall cost of owing a house in the country and calls for National Settlement Policy for diversifying and optimising the supply of housing as per the demands in the country.

Based on the assertions of the concerned article, this section of the report tries to identifying the primary issues cropping up in the housing market of the country and also tries to highlight the stakeholders who are being affected by the concerned issue.

Primary issue of concern

As is evident from the assertions of the article, the primary issue which can be seen to be present in the contemporary housing sector of Australia is that of the problem of affordability of owing a house in the country, especially in the urban and industrially active and economically robust metropolitan zones of the country (Austin, Gurran and Whitehead 2014). The prices of the houses in the country has been seen to be rising strikingly over the last few years, much of which can be attributed to the increase in the population in the country, attributed to both the domestic increase in the population as well as the increase in the immigration of people in the country from all part of the country. The Permanent Migration Programme of the country has even facilitated this inflow of immigration in the country as can be seen from the following figure:

As can be seen from the above figure, nearly all types of immigrants have inflowed increasingly in the country over the last few decades, thereby increasing the number of total immigrants in the country considerably in the recent times, putting an upward pressure in the population of the country. This in turn has led to the increase in the demand for the housing assets in the country (MacKillop 2013).

Apart from the increase in the population, the increasing practice of investing in the housing sectors with the objective of alternative and lucrative form of investment and asset build up, has led to the upward pressure in the demand for the same, thereby increasing the prices of the housing properties in the country. This can be measured by the House Price Index, which shows the price of a single-family residential facility in a particular market. In case of Australia this can be seen as follows:

As is evident from the above figure, the housing affordability of Australia is much low as compared to the world (Forrest 2013).

Effects on stakeholders

The primary section affected by this affordability issue is the population of the country, especially the lower and middle-income class population, whose 30% to 50% of the total gross income is spent for this purpose (Ampcapital.com.au 2018). With the decrease in the affordability the share of this section of the population is also seen to be increasing in the country as can be seen from the following figure:

However, the recent policy of increase in the supply of housing properties in the country is not seen to be highly effective in reducing the price of the same in the country, which can be explained with the help of the conceptual framework of economics.

The problem stated above can be categorised as a problem of demand and supply mismatch in the market. As is known, the demand for normal commodities decrease with the increase in price and vice versa, thereby giving the demand curve a negative slope:

On the other hand, the supply for normal commodities is directly proportional to the price as can be seen from the positively sloped supply curve:

Keeping this into consideration, the increase in the supply of houses, as can be seen to be happening in the housing sector of the Australia, is expected to reduce the price of the housing assets keeping the demand for the housing assets same, as can be seen from the following figure:

As is evident from the above figure, the increase in supply of the housings in a huge number is expected to reduce the price of the same in the normal condition (Baumol and Blinder 2015). However, this is not the case in Australia, primarily because the steps taken by the government of the country to financially support the people interested to buy new homes, in the form of tax cuts, schemes for first time home owners, low interest rates and others, which have in turn resulted in the aggregate demand for housings substantially, in the country, the effects being shown as follows:

As is evident from the above figure, the schemes and steps taken by the government of the country has led to the increase in the demand more than the increase in the supply, thereby actually raising the price of the assets and aggravating the housing affordability crisis of the country even more (Pindyck and Rubinfeld 2014).

Conclusion

As can be seen from the above discussion, the housing affordability crisis has increased consistently in Australia with time and the increase in supply has not helped in reducing the problem substantially. In this situation, providing monetary support and incentives will lead to an increase in the aggregate demand thereby increasing the problem of affordability. In this situation the primary step which can be taken by the government is to put price restrictions on the housing market, in the form of price ceilings, by not leaving the price entirely in the hands of the market itself. The government should also induce the suppliers to increase the numbers of budget housings so as to benefit the lower and middle-income class of the country, who has been the worst hit of the housing affordability crisis in Australia.

References

Ampcapital.com.au (2018). Australian housing affordability crisis – can government policies fix the problem?. [online] Ampcapital.com.au. Available at: http://www.ampcapital.com.au/article-detail?alias=/site-assets/articles/latest-news/australian-housing-affordability-crisis [Accessed 27 Apr. 2018].

Austin, P.M., Gurran, N. and Whitehead, C.M., 2014. Planning and affordable housing in Australia, New Zealand and England: common culture; different mechanisms. Journal of Housing and the Built Environment, 29(3), pp.455-472.

Baumol, W.J. and Blinder, A.S., 2015. Microeconomics: Principles and policy. Cengage Learning.

Businessinsider.com.au (2018). Australia has 5 of the world's 20 least affordable cities in which to buy a home. [online] Business Insider Australia. Available at: https://www.businessinsider.com.au/australia-has-5-of-the-worlds-20-least-affordable-cities-in-which-to-buy-a-home-2016-9 [Accessed 27 Apr. 2018].

Butlin, N.G., 2013. Investment in Australian economic development, 1861-1900. Cambridge University Press.

Forrest, R., 2013. Housing and family wealth. Routledge.

Lee, C.L. and Reed, R.G., 2014. The relationship between housing market intervention for first-time buyers and house price volatility. Housing studies, 29(8), pp.1073-1095.

MacKillop, F., 2013. Sustainable as a basis of affordable? Understanding the affordability ‘crisis’ in Australian housing. Australian Planner, 50(1), pp.2-12.

Macrobusiness.com.au (2018). Greens' immigration policy to create giant enviro-stomping Australia - MacroBusiness. [online] Macrobusiness.com.au. Available at: https://www.macrobusiness.com.au/2017/04/greens-immigration-policy-create-big-australia/ [Accessed 27 Apr. 2018].

Pindyck, R.S. and Rubinfeld, D.L., 2014. Microeconomics.

Randolph, B., Pinnegar, S. and Tice, A., 2013. The first home owner boost in Australia: a case study of outcomes in the Sydney housing market. Urban Policy and Research, 31(1), pp.55-73.

Thefifthestate.com.au (2018). More housing hasn’t fixed Australia’s affordability crisis. It’s time for a national settlement strategy. [online] Thefifthestate.com.au. Available at: https://www.thefifthestate.com.au/columns/spinifex/more-housing-hasnt-fixed-australias-affordability-crisis-its-time-for-a-national-settlement-strategy [Accessed 27 Apr. 2018].

Wadud, I.M., Bashar, O.H. and Ahmed, H.J.A., 2012. Monetary policy and the housing market in Australia. Journal of Policy Modeling, 34(6), pp.849-863.

Worthington, A.C., 2012. The quarter century record on housing affordability, affordability drivers, and government policy responses in Australia. International Journal of Housing Markets and Analysis, 5(3), pp.235-252.

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