Question

For your chosen phenomenon, conduct an economic analysis bearing in mind the purpose and remit of this course.

An introduction should typically outline the phenomenon you have chosen and highlight its significance. You may present some data to illustrate the phenomenon. Good economic analysis entails identifying (1) the various aspects of the exchange process (the market, the agents involved, the equilibrium outcome), (2) the factors that can affect market outcomes over time and (3) the welfare implications of the exchange outcome and whether there is scope for government intervention. Use graphs, formulae and diagrams where they help your explanations (more rigorous and succinct) compared to words alone. A good conclusion section will provide a look at the big picture, the significance of your findings in a larger context, and even suggest limitations of the models that you have used. Remember this is an economics assignment and therefore you should refrain from writing a report that is general and/or journalistic in nature.

The word limit is 1500 words. As a suggestion, you might want to spend 300 words each on the introduction and conclusion and 900 words on the analysis. However, this may vary depending on your chosen topic and personal style

Phenomenon of choice;

1) Housing Prices in Melbourne

Expenditure on housing is one of the major expenses individuals face in their lifetime.

However, over the last 20 years, housing prices have fluctuated quite considerably.

You have been hired by a consumer affairs think-tank and tasked with producing an economic analysis explaining economic reasons why housing prices fluctuates over time (last 20 years) and its impact on relevant markets in the economy.

Finally discuss some of the welfare implications (think of consumer and producer surplus) of changes in housing prices.

Answer 1

Introduction:

It is a generally observed common phenomenon that when the price of anything rises above a limit to reach unsustainable levels it is bound to come down. Think of it as a bubble which keeps on expanding until it reaches the unsustainable level and bursts. The Australian housing crisis is an example of the above mentioned phenomena. Australia has always avoided pitfalls where other countries fall but this time it may prepare itself for a really hard landing.

Housing prices has always been seen as a signal of economic well being and when you look at Australia especially Melbourne and Sydney through the same spectacle the situation doesn't look so good. Sydney property values continued to fall in January, driving nationwide house prices back to levels last seen in October 2016, amid tighter lending conditions and high levels of housing supply. The housing market has always handed the key of power in sellers' hand but now the power has shifted towards buyers and the number of houses being advertised is ever increasing. Let us understand the housing market and what factors have effect on it.

First of all it is necessary to understand what a buyers' market and a sellers' market really mean because they constitute the very basic of the housing market.

A sellers' market is one in which there are more buyers than sellers and hence the condition naturally favors the sellers as they can demand higher prices thereby pushing prices higher and higher. Houses are sold very quickly in a sellers' market.

On the other hand, in a buyers' market homes take longer to sell which means that there are more sellers than buyers so sellers have to reduce the price to sell the house created a downward spiral and surplus inventory.

The buyers' and sellers' market are two extremes of the housing market and in between them comes a phase of transition where consolidation occurs and situation doesn't favor anyone. The transition from buyers' to sellers' or vice versa takes time and thus paves the way for transitional market to kick in and stabilize prices.

From the definition it is clear that one should buy a house in buyers' market and sell in sellers' market. It sounds fairly simple but it isn't. The simple concepts of supply and demand determines the price at which the market will consolidate.

Let us now understand what factors effect the supply and demand of housing.

1. Income- The first and foremost thing that comes to mind when you think of the factors is one's income. A high income will lead to greater demand of houses and low income will quench the longing of a house. House is not only a place to live but it is also an investment and to make that investment you must have surplus income.

2. Credit - The availability of credit plays a major role in the demand of houses. The cheaper the availability of credit the higher the demand. There is an inverse relationship between the cost of credit and the demand of housing. When the central bank of a country reduces the benchmark lending rates it leads to the availability of credit at a cheaper cost spurting demand of houses.

3. Land availability- It is an example of supply constraint because one cannot increase the supply of land and the scarcer the resource is the higher the price on has to pay to obtain it.

4. Inflation – Inflation affects a consumer’s real income. When the price of goods and services rise, an individual’s income is worth less, which limits his or her ability to purchase a home.

5. Taxes- When the taxes rise the size of disposable income available to the consumer to spend decreases thus reducing the demand of housing.

6. Status Symbol- Owning a house has always been associated with a sense of Superiority and has been viewed as a status symbol thus increasing it's demand. If tomorrow something else appears to be more superior then people will buy that thereby reducing the demand of houses.

Much of the real estate market is driven by economic principles. But not all of it.

In the real world, there are any number of drivers that can push people to buy or sell. There are fads and styles. One may change job or may get transferred to a new place causing relocation. Also, buying and selling real estate is a very hectic process so most people don't do it more than once. It is also very illiquid .

The above factors broadly effect he housing market and in the backdrop of these factors it becomes easy to understand how a housing bubble is formed. When these factors are in favour of buyers' they push demand and it reaches the point where sellers gain the control and this cycle continues. However some housing bubble can last for years.

Conclusion -

Housing bubbles don't only affect the real estate industry, but also have a significant effect on people of all classes, neighborhoods and the overall economy. They can force people to look for ways to pay off their mortgages through different programs or may have them dig into retirement accounts to afford to live in their homes. Housing bubbles have been one of the main reasons why people end up losing their savings.