Australian Housing Market Theory
Introduction
In the last four years Australia 's housing market has the strongest performance to date. In 2013 alone "House prices in the country´s eight major cities rose by 9.48% (6.47% inflation-adjusted) during 2013, up from a minimal year-on-year increase of 2.61% (0.48% inflation-adjusted) in 2012, an annual decline of 4.41% in 2011 and a year-on-year rise of 4.72% (7.26% inflation-adjusted) in 2010, based on figures released by the Australian Bureau of Statistics (ABS)."
The consistent performance possibly indicates that the current Australian housing market may be in a bubble. The reasoning for this can be due Australia 's GDP having steadily risen over the last four years, and the purchasing of residential properties from foreign investors, particularly Chinese investors.
The first thesis of this essay (Section 1) is briefly discussing the problems related to being in a possible real estate bubble, …show more content…
the way in which prices are effecting this, and what could result because of this.
The second thesis in the essay (Section 2) is related to the key macro and microeconomic factors which are impacting the current Australian housing market such as the GDP, unemployment, inflation, and foreign investment. Analysis of behaviours in determining prices and quantities within this market with the theory of 'Aggregate Demand and Aggregate Supply ' and 'Game Theory '.
Body
Section 1
The 'real estate bubble ' is arguably a real event that is currently occurring in the Australian housing market. The London based media company, The Economist, argued that the largest bubble in our time could be observed by the housing market. Other popular articles also argue 'against ' this view such as Krainer, 2003. Arguments for the bubble suggest that it can be due to the generous lending of policies of banks (Reinhard & Rogoff 2008), likewise to the current policies in place with the Australian lenders. Supporting the reason as to why the current bubble has not turned to a market failure like the US market can be associated with stricter lending standards and over recent years the government 's stimulus packages enabling first homebuyers to enter the housing market.
Nevertheless, housing is remaining 'severely unaffordable '. According to the 2013 9th Annual Demographia International Housing Affordability Survey, Australia has ranked third as the most unaffordable housing market. The bubble the current market is in has enabled prices of property to soar due to the our growing population, resulting in higher demands for property, in which the supply is struggling to meet. This is also causing home owners and investors to 'over-evaluate ' their property values, so much that Australia 's property market is currently valued at $4.9 trillion, and 10% of that is estimated to be the optimistic valuations (RP Data 2013).
The possible results for the Australia housing market 's bubble to 'burst ', would mean unbelievably low housing prices for a generation, but this would be detrimental to the rate of unemployment that greatly impact upon the economy (similar to that of the US in 2007).
Section 2
Several macroeconomic factors are impacting the rates of supply and demand within the Australian housing market. The consistent GDP year after year is encouraging buyers with greater lending amounts at a lower rate. The incentive system has made it rational for individuals to make decisions that from the outside look irrational (Garber, 2000). In this case the demand is greater than the supply. Supporting the demand is our increasing population and lower levels of unemployment. Also 'Game Theory ' between the buyers and sellers is a key determinant for decisions being made.
Figure 1 below shows a diagram representing the macroeconomics model for Aggregate Demand and Aggregate Supply. Imagining the economy is at point A, an unfavourable supply shock would shift the short run aggregate supply curve up from SRAS1 to SRAS2. If the price level was to increase from P1 to P2, the output decreases for Y1 to Y2. Now in the case of the housing market, the implication of a supply side shock, such as higher property prices, may not decrease the output if the prices are sticky. Therefore, when the banks see the increase in property price, they should not automatically favour it with an increase in the money supply.
Figure 1 (MacGarrity, 2009)
The other theory (for microeconomics) is 'Game Theory ', and in particular, 'Behavioural Game Theory '.
The reason that this theory can be applied to the Australian housing market is due to the strategic decisions that buyers and sellers can make when negotiating. In this case lets say High and Low offers. The buyer obviously prefers to buy Low whereas the seller prefers to sell High. Refer to Figure 2 below. HIGH LOW
HIGH Seller is much better off Buyer is better off
LOW Seller is better off Buyer is much better off
*Buyer on top/Seller on the left side.
In the table above you can see that if the seller offers a high price and the buyer agrees, the seller is much better off than if they lowered a lower price to a buyer willing to pay high. Likewise if the buyer was approached with a lower purchase price and took it, they are much better off as opposed to taking a higher price when they wanted to pay
less.
Conclusion
The main theses that has been developed in this essay:
Real Estate Bubble: The current Australian housing market is arguably in a bubble. The risks of a crash or burst of this bubble could have severe effects upon our economy in regards to unemployment levels and inflation. With the decisions being made by the Government and banks in terms of policies, lending and rates, foreign investment and the increase of demand will inevitably cause great changes to be made.
Bibliography
Australian Bureau of Statistics, (2014). "Residential Property Price Indexes: Eight Capital Cities, Dec 2013" Retrieved 22nd April 2014 from: http://www.abs.gov.au/ausstats/abs@.nsf/mf/6416.0
Economist (2005), "The Global Housing Boom". June 16th 2005.
Krainer, J, (2003),"House Price Bubbles", FRBSF Research Letter, 6/2003, p 1-3
Reinhart, C, & Rogoff, K, (2008), ”Is the 2007 U.S. Sub-Prime Financial Crisis So Different? An International Historical Comparison”. Working Paper.
RP Data, (2013). "Property Market Update" Retrieved 24th April 2014 from: http://www.rpdata.com/images/stories/content/indices_pack/2013_july_rpdata_indices_chartpack.pdf
Joseph P. McGarrity, (2009) "Supply shocks and menu costs", Humanomics, Vol. 25 Iss: 4, pp.268 - 273
Global Property Guide, (2014). "Property Prices in Australia" Retrieved 24 April from: http://www.globalpropertyguide.com/Pacific/Australia/Price-History
In the last four years Australia 's housing market has the strongest performance to date. In 2013 alone "House prices in the country´s eight major cities rose by 9.48% (6.47% inflation-adjusted) during 2013, up from a minimal year-on-year increase of 2.61% (0.48% inflation-adjusted) in 2012, an annual decline of 4.41% in 2011 and a year-on-year rise of 4.72% (7.26% inflation-adjusted) in 2010, based on figures released by the Australian Bureau of Statistics (ABS)."
The consistent performance possibly indicates that the current Australian housing market may be in a bubble. The reasoning for this can be due Australia 's GDP having steadily risen over the last four years, and the purchasing of residential properties from foreign investors, particularly Chinese investors.
The first thesis of this essay (Section 1) is briefly discussing the problems related to being in a possible real estate bubble, …show more content…
the way in which prices are effecting this, and what could result because of this.
The second thesis in the essay (Section 2) is related to the key macro and microeconomic factors which are impacting the current Australian housing market such as the GDP, unemployment, inflation, and foreign investment. Analysis of behaviours in determining prices and quantities within this market with the theory of 'Aggregate Demand and Aggregate Supply ' and 'Game Theory '.
Body
Section 1
The 'real estate bubble ' is arguably a real event that is currently occurring in the Australian housing market. The London based media company, The Economist, argued that the largest bubble in our time could be observed by the housing market. Other popular articles also argue 'against ' this view such as Krainer, 2003. Arguments for the bubble suggest that it can be due to the generous lending of policies of banks (Reinhard & Rogoff 2008), likewise to the current policies in place with the Australian lenders. Supporting the reason as to why the current bubble has not turned to a market failure like the US market can be associated with stricter lending standards and over recent years the government 's stimulus packages enabling first homebuyers to enter the housing market.
Nevertheless, housing is remaining 'severely unaffordable '. According to the 2013 9th Annual Demographia International Housing Affordability Survey, Australia has ranked third as the most unaffordable housing market. The bubble the current market is in has enabled prices of property to soar due to the our growing population, resulting in higher demands for property, in which the supply is struggling to meet. This is also causing home owners and investors to 'over-evaluate ' their property values, so much that Australia 's property market is currently valued at $4.9 trillion, and 10% of that is estimated to be the optimistic valuations (RP Data 2013).
The possible results for the Australia housing market 's bubble to 'burst ', would mean unbelievably low housing prices for a generation, but this would be detrimental to the rate of unemployment that greatly impact upon the economy (similar to that of the US in 2007).
Section 2
Several macroeconomic factors are impacting the rates of supply and demand within the Australian housing market. The consistent GDP year after year is encouraging buyers with greater lending amounts at a lower rate. The incentive system has made it rational for individuals to make decisions that from the outside look irrational (Garber, 2000). In this case the demand is greater than the supply. Supporting the demand is our increasing population and lower levels of unemployment. Also 'Game Theory ' between the buyers and sellers is a key determinant for decisions being made.
Figure 1 below shows a diagram representing the macroeconomics model for Aggregate Demand and Aggregate Supply. Imagining the economy is at point A, an unfavourable supply shock would shift the short run aggregate supply curve up from SRAS1 to SRAS2. If the price level was to increase from P1 to P2, the output decreases for Y1 to Y2. Now in the case of the housing market, the implication of a supply side shock, such as higher property prices, may not decrease the output if the prices are sticky. Therefore, when the banks see the increase in property price, they should not automatically favour it with an increase in the money supply.
Figure 1 (MacGarrity, 2009)
The other theory (for microeconomics) is 'Game Theory ', and in particular, 'Behavioural Game Theory '.
The reason that this theory can be applied to the Australian housing market is due to the strategic decisions that buyers and sellers can make when negotiating. In this case lets say High and Low offers. The buyer obviously prefers to buy Low whereas the seller prefers to sell High. Refer to Figure 2 below. HIGH LOW
HIGH Seller is much better off Buyer is better off
LOW Seller is better off Buyer is much better off
*Buyer on top/Seller on the left side.
In the table above you can see that if the seller offers a high price and the buyer agrees, the seller is much better off than if they lowered a lower price to a buyer willing to pay high. Likewise if the buyer was approached with a lower purchase price and took it, they are much better off as opposed to taking a higher price when they wanted to pay
less.
Conclusion
The main theses that has been developed in this essay:
Real Estate Bubble: The current Australian housing market is arguably in a bubble. The risks of a crash or burst of this bubble could have severe effects upon our economy in regards to unemployment levels and inflation. With the decisions being made by the Government and banks in terms of policies, lending and rates, foreign investment and the increase of demand will inevitably cause great changes to be made.
Bibliography
Australian Bureau of Statistics, (2014). "Residential Property Price Indexes: Eight Capital Cities, Dec 2013" Retrieved 22nd April 2014 from: http://www.abs.gov.au/ausstats/abs@.nsf/mf/6416.0
Economist (2005), "The Global Housing Boom". June 16th 2005.
Krainer, J, (2003),"House Price Bubbles", FRBSF Research Letter, 6/2003, p 1-3
Reinhart, C, & Rogoff, K, (2008), ”Is the 2007 U.S. Sub-Prime Financial Crisis So Different? An International Historical Comparison”. Working Paper.
RP Data, (2013). "Property Market Update" Retrieved 24th April 2014 from: http://www.rpdata.com/images/stories/content/indices_pack/2013_july_rpdata_indices_chartpack.pdf
Joseph P. McGarrity, (2009) "Supply shocks and menu costs", Humanomics, Vol. 25 Iss: 4, pp.268 - 273
Global Property Guide, (2014). "Property Prices in Australia" Retrieved 24 April from: http://www.globalpropertyguide.com/Pacific/Australia/Price-History