Econ 7002 House Prices in Australia

ECON 7002 Essay

Nowadays, an increasing number of people are joining the discussion of the house prices in Australia. The real estate businesses trade in services about land and houses. Monopolistic market competition exists. It provides development, sales, rental and management of properties. This industry has geographical boundaries due to the differences in price per unit and characteristics of each districts. For example, the price per unit in Melbourne city is surely higher than suburbs. And some areas have specific features like convenient transportation, close to amenities and school district housing. For further analysis of this industry, the paper named “Housing collapse will hurt retailers” has been chosen. This article talks about the relationship between property industry and retailing industry. The author holds that the fall in houses prices will bring related industries down. So, this essay intends to describe the view in article as well as critical analysis in different perspective.

“House-led retailer share prices are highly leveraged to house prices,” mentioned by the article. Focus on the housing collapse, James found that the decline in house prices will bring price of retailing business down. He offers explanation by comparing trend of shock in house prices and retailer prices from 2010. It shown that housing prices fell 5% while the total return of shares in some house-led retailers dropped almost 40%. These changes in market put them in dilemma. Besides, he mentioned that the retailers like JB Hi-Fi and Harvey Norman faced the pressure of renovation, which also affects the sales performance. All these situations are because of decrease in consumer demand while supply quantity does not change a lot. Further explanation shown as followed.

To draw conclusion that property prices decrease, the underlying assumption might be the exclusion of overseas consumers. As reported by Stephen (2017), the housing demand of Chinese consumers, equivalent to 25 percent of new housing supply in New South Wales and 16 percent in Victoria, rises because of subsidies given by Australian government. Then, this financial position can be justified by some economic concepts we learned. First of all, the reasons of falling in housing prices is due to the lower demand of local consumers and tax imposed. Factors of changes in demand are incomes, interest rate and rental expenses. All of those shift the demand curve (Graph 1). And as learned in class, when a tax is imposed in a market, both sellers and buyers take on part of the tax burden. So, the real estate price will decrease. Additionally, the house-led retailers are complements to housing. The requirement of household products is highly bound up with real estate purchasing. So, in this case, the lower demand in houses will hit the sales of retailers, shifting retailing demand curve to left. However, this article fail to make further illustration on issues of facing vulnerable stocks as well as lesser cash available to consumers. For example, how low wage growth or rising mortgage costs affect the housing market as well as retailing market. Economic theory suggests that the availability and use of consumer credit may affect consumer expenditures on all goods, particularly durable goods. Importantly, consumers frequently take loans to purchase long-lasting items like housing, thereby exceeding their current income levels (Sloman, Norris and Garratt, 2013). But the expectation of ability to repay is based on current earnings. Then the decrease in consumer income leads to decrease the demand of housing, shifting curve to the left. [pic 1]

Considering in different perspective, firstly, to some extent the housing prices increased in last 12 months. Eliminating previous assumption made, I take all consumers into consideration. As reported by Domain Group’s rental and house price, the median real estate price climbed more than 10% at the end of 2016. Taking the view of Propertybuyer director Mr. Harvey (2017), with few signs of any sudden market changes but strong local economy, constricted housing supply and low interest rates, 2017 will likely bring continued strong growth for houses. So, as forecasting future higher price, there is increase in customer demand, shifting demand curve to right (Graph 2). Then, the prices of house-led retailing industry are also influenced by other factors. Personal income directly influences the demand of retailing industries sales. To analysis this factor, I choose consumer debt burden as methodology, which represents the remaining credit capacity as a percentage of disposable personal income that consumers can access before exceeding recommended debt limits (Aph.gov.au, 2017). The underlying assumption here is that rational consumers will not exceed the general rules of credit capacity to purchase furniture or home furnishings. Then household debt service ratio shows under a fair standard for a maximum debt ceiling for a consumer. For which, the price of house-led retailing products fall, shift demand curve to left. moreover, people’s preferences often change and as a result there is change in demand for them. The changes in demand for various goods occur when there are the changes in fashion or the pressure of advertisements by the manufacturers and sellers of different products. As it is under the innovation pressure, the supplier may not follow the step with customer fashion preference. Last but not the least, to solve those economic downturn, some market interventions should be introduced. On the one hand, government should give tax relief to those who want to purchase housing, like less stamp duty fee. While there is lower tax burden to customer, they take this benefit and show higher demand. On the other hand, the should be house purchase restriction to prevent from speculate in real estate. Policies like progressive taxation for additional purchases or tax on empty properties are considerable. To warm the retailing market, there may be necessary cost of researches on customer preference. And this expenditure can not only be claimed to reduce taxation, but also increase the demand of consumers.[pic 2]