BECO107 Business Economics

a) Discuss as to why house prices are so high in these two capital cities and provide evidence to support your answer.
b) Suggest ways the house prices can be contained (reduced) and provide evidence to support your answer.

Noteworthy, Australian cities of Melbourne and Sydney are among the highly priced in the housing industry in the world. The high price of housing facilities has made housing facilities unaffordable for most of the Australian population thus there is urgent need for government intervention to regulate the skyrocketing housing prices in the cities of Melbourne and Sydney. According to some economists, the high prices are attributed to the shortage of supply for the housing facilities (Collyer, 2016).Furthermore, population increase due to the high migration rates into Sydney and Melbourne has increased pressure of on the demand and supply of housing facilities in the two cities.

Causes for the High Housing Prices.

Typically, interest rates on financial credit facilities has boosted accessibility to finances by the Australian Population. For Instance, high-interest rates on loans reduces the number of borrowers whereas low-interest rates increases the number of borrower thus boosting the number of homeowners who use credit facilities to afford decent and affordable housing facilities(Parliamentary Business Committee ,N. d)Due to low-interest rates ,housing prices are likely to be high. Further, low-interest rates are likely to boost the housing demand (Holt, 2009) Subsequently, the high demand for houses will drive the housing prices to keep going up (Robb ,2017)

     Essentially, financial regulation is vital for any financial entity .Usually, financial regulation is done by the government .Through financial regulation the inflow and outflow of money can be monitored to provide a balance .However ,inadequate government regulation of the financial sector has led to easy accessibility of credit facilities from financial credit institutions which has contributed to a large population accessing it and acquiring housing facilities. Through financial credit facilities, a large population of Australians has access to decent housing through credit facilities. There’s need for adequate financial regulation to maintain the balance of cash inflow and outflow for financial stability reasons.

            Further, competition has made the Australian housing sector to be very competitive thus the high prices(Law,2016)The entry of foreign and domestic housing providers has created competition for both providers thus prompting the need for high prices to maximize profits .In addition ,there’s a huge number of foreign dwellers who have added prestige and pressure on the housing arrangement in Sydney and Melbourne( Exflin, N. d)Also, the entry of migrants into the cities in search of better economic profits and services has added pressure on the short supply of housing facilities in the Australian cities(Verrender,2015)With population increase there’s need for added supply.

           In addition, there’s increasing demand and supply of dwelling facilities in Sydney and Melbourne due to the population increase, by Australians and immigrants (Koziol,2017)Population increase influences an increase in demand for housing facilities hence prompting the need for an increase in supply .However, due to the shortage in supply of housing facilities in the cities of Melbourne and Sydney due to land scarcity and urban regulation laws, the demand for more houses isn’t met thus expanding the housing unaffordability. The limited supply of houses causes the high house prices in the two cities of Sydney and Melbourne.

       Recently, there have been household size changes in Australia. Most housing developers are adopting fairly large and luxurious household sizes thus prompting the high house prices. Simply put, large and luxurious household construction costs are fairly large as compared to construction of smaller house units .Inevitably, housing suppliers will want to recover the construction costs and maximize profits thus the high house prices in Sydney and Melbourne. Due to the changing household sizes, there’s high demand for smaller unit housing arrangement hence the high prices .Largely, housing providers aim to make profit not losses thus transferring additional construction costs to homeowners.

Housing Sector Regulation.

Necessarily, there’s need for government intervention to encourage housing affordability in the cities of Sydney and Melbourne.Universally ,most economies recognize the right to shelter as a basic human right despite most of the global population inability to afford decent and affordable housing facilities .Inability to access decent housing facilities has enhanced poverty ,poor mental and physical health plus homelessness .However ,the Australian government has recognized the urgency for housing sector regulation in a bid to accord its citizens decent and affordable housing facilities.

         Notably, the Australian government has availed housing grants and subsidies to its housing developers. This move is aimed at increasing the supply of housing facilities across the Australian states. Through subsidies and grants, constructors are able to incur low production costs which  eventually translate to productive and allocative efficiency. Moreover ,low operating costs maximizes profits  for housing providers. Further, subsidies encourage low prices for the housing facilities thus looking out for consumer welfare. With low operating and construction costs, constructors are likely to build more housing facilities to meet the growing demand for houses thus lowering the prices.

        Substantive investment by the Australian government into the public housing system will not only reduce the rate of homelessness but create employment opportunities for the constructors. Through the implementation of the public housing system the supply of dwelling places will increase thus reducing the demand for housing in highly priced cities(Dalzell,2016)There’s urgent need for the Australian government and other governments to  embrace public housing system. Affordability of public housing facilities will greatly reduce the number of homeless people in Sydney and Melbourne. Housing supply is triggered by housing demand.

        Alternatively ,grants have been made accessible for the Australian population .Noteworthy, there is the housing schemes by the Australian government and private stakeholders.Low and middle income population have access to alternative home ownership arrangements(Australian Bureau of Statistics ,N .d)For instance, there is the  shared home ownership arrangement between the potential homeowner and the government whereby the potential homeowner affords housing facilities by opening an account at the Australian housing department and later offered 70% stake home ownership ,with the government owning 30%.Remarkably,the homeowners have the option of buying out the government and fully owning the home.

    Under the shared home ownership arrangement, young professionals are able to afford housing facilities at whatever age due to the favorable available options .The shared home ownership is terminated when the homeowner buys out the government stake. The housing department of Australia has offered start up loans  accounts through which Australians can access and own decent and affordable housing facilities thereby reducing the demand for housing facilities and enhancing the supply of dwelling facilities for its growing local and foreign population. Through shared home arrangement options, most of the Australian population has afforded decent and affordable housing facilities.

       In addition, as an incentive for home ownership, there is the first home ownership grant for the Australian population especially for convenient for young professionals’ .Usually, potential homeowners are expected to apply for the grants on the first home they intent to acquire(Lusted,2017)Housing grants are offered by the government to boost the supply of housing facilities and to reduce the rate of homelessness among its growing population(Office of state revenue,2017)Through this first home ownership grant ,young professionals are able to afford housing facilities in highly priced areas like Sydney and Melbourne. First Grant home ownership has helped many young people own homes at a very young age.

       Globally, mortgage is a widely recognized way of acquiring home ownership. Through mortgaging, potential homeowners have physical possession of the house on repayment terms being set at the onset of the arrangement. Usually, financial institutions such as banks offer mortgages to the population. Through taking out a mortgage, a young professional is able to afford decent housing in highly priced areas such as Sydney and Melbourne due to this arrangement.Mortgages are convenient due to the fact that a person taking out a mortgage is able to choose the type of mortgage arrangement they are best suited with regarding its payment arrangements.

    Undeniably, Sydney and Melbourne form part of the global high house price category due to various factors. Predominantly, population increase and supply shortage have been considered the main causes. However, land scarcity in urban areas and availability of credit  financial facilities have also boosted the high housing prices. However, the Australian market has availed alternative ways of home ownership through first home ownership grants ,mortgages subsidies, housing schemes and public housing schemes. There’s need for government intervention to increase the supply of housing facilities in the two cities to bring down the skyrocketing prices .The high prices of dwelling facilities is due to the increase in demand but in response there s a supply shortage. A substantive  supply boost of houses will reduce the price in Sydney and Melbourne.

References.

Australian Bureau  of Statistics. (N.d.)Housing Finance, Australia, February 2017.Australian Bureau of Statistics. [Online]Available at http://www.abs.gov.au/ausstats/abs@.nsf/exnote/5609.0[Accessed 3 June 2017]

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 3 June. 2017].

Dalzell, S. (2016). Push for shared home ownership scheme in NSW to help those locked out of the market. [Online] ABC News. Available at: http://www.abc.net.au/news/2016-07-27/calls-for-nsw-shared-home-ownership-scheme-to-be-introduced/7666232 [Accessed 3 June. 2017].

Exfin. (n.d)The purchase of Australian property by foreign residents.Exfin.[Online]Available at https://exfin.com/australian-property-firb[Accessed 3 June 2017]

Office of State Revenue.(2017).First Home Owner Grant (New Homes) Scheme. [Online] Office of State Revenue. Available at: http://www.osr.nsw.gov.au/grants/fhog [Accessed 1 June 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.[Accessed 3 June 2017]

Koziol, M .(2017)Immigrants to blame for high house prices, Businessman Dick Smith claims. The Sydney Morning Herald.[Online]Available at http://www.smh.com.au/federal-politics/political-news/immigrants-to-blame-for-high-house-prices-businessman-dick-smith-claims-20170221-gui72k.html[Accessed 3 June  2017]

Law, J. (2016). Housing affordability: Are foreign investors to blame for Australia’s high property prices. [Online] News.com. Available at:  http://www.news.com.au/finance/real-estate/buying/housing-affordability-are-foreign-investors-to-blame-for-australias-high-propertyprices/news-story/710ba2cff1932f0fb3f81ce83a07946b [Accessed 3 June. 2017].

Lusted, P.(2017)First Home Owner Grant to double for Buyers in Regional Victoria. ABC News.[Online]Available at http://www.abc.net.au/news/2017-03-03/first-home-buyers-in-regional-victoria-to-get-a-20k-boost/8320902[Accessed 3 June 2017]

Parliamentary Business Committee. (n.d.)Factors Influencing the Demand For Housing. Parliamentary Business Committee. [Online] Available at http://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Former_Committees/hsaf/report/c04[Accessed 3 June 2017]

Robb, K.(2017)Perth House bust: What  can Sydney and Melbourne learn from the West? Domain. [Online]Available at https://www.domain.com.au/news/perth-house-price-bust-what-can-sydney-and-melbourne-learn-from-the-west-20170404-gvd9g0/[Accessed 3 June 2017]

Verrender, I. (2016). Who's the real culprit behind soaring house prices? (Hint: it's not Chinese buyers). [Online] ABC. Available at http://www.abc.net.au/news/2015-06-08/verrender-whos-the-real-culprit-behind-soaring-house-prices/6528710 [Accessed  3 June 2017].