Macroeconomics Supply and Pricing

Questions: 1.Explain the reasons behind Australias surging housing prices.2.Detail macroeconomic solutions the government can undertake to ensure affordable housing for the youngergeneration. Answers: 1. According to the fundamentals of economics, the demand, supply and pricing of any item or services are interlinked with each other. By applying the same economic concept, the reasons behind the surging housing prices in Australia can be explained (Shearer, Coiacetto, Dodson, Taygfeld, 2016). Meanwhile, the increased population in the metropolitan cities and the improved standard of living of the Australian community have been majorly acted as the drivers leading to rising in the price level of land and housing (Roseland, Cureton, Wornell, 2008). Herein, the major factors leading to the event have been shown in the underlying section as follows: Availability of housing loans at a low-interest rate: The financial institutes in Australia have offered housing loans to the social public of Australia at an affordable interest rate. As a result of the consequences, the more Australian public has come to the metropolitan cities for better opportunities. Thus, the demand of the houses has contributed to the surging price level (Steele Gleeson, 2011). Improved standard of living and income level: Currently, foreign direct investments have largely contributed to the improvement of the social living standard. Also, the income status of the Australian has been improved substantially. Hence, the maximum popularity has intended to shift their livelihood in the cities leading to increasing demand for houses (Gurran, Gallent, Chiu, 2016). Therefore, the surging demand for the house has led to increasing in pricing. Compact supply of housing lands: Another important factor leading to surging housing prices is the compact supply. As the supply of land is somewhat constant, the suppliers cannot provide the land according to the demand. In this way, the demand has surpassed the supply of houses fuelling the price hike of houses in Australia. On the basis of economics fundamentals, the demand side impact and supply side impact have been distinctly analysed in the section to identify how the drivers are leading to price hike of housing in Australia. Mainly, the low-interest loans and improved standards of living have led to the rise in demand of housing forcing the price surge to become inevitable. Figure 1: Impact of Change in Demand of House and Land Source: (Evans, 2014) As shown in the above figure 1, due to easy loan affordability and improved income standards of the Australians, the demand curve has been moved to right from D to D1 though the supply remains constant as the straight line S. As a result of the shift in demand has increased the price level of housing to P to P1. Therefore, decisively it can be said that the surge in demand leading to price hike of houses. Figure 2: Impact of Change in Supply of House and Land Source: (Evans, 2014) Now, considering the supply scenario of available housing lands, massive demand of lands has contributed to the shortage of supply as shown in the figure 2. The supply curve is shifted towards left from S1 to S2 showing the shortage in supply. Therefore, the contraction in supply scenario has fuelled the pricing of hoses from the point P1 to P2. In this way, the limited supply of land for the housing complex has led to surge in pricing (Parks Hardie, 2013). 2. Australian economy has evident a surging housing prices that has resulted in a decreasing housing affordability for the younger generation. In other words, the younger generation of Australia demands more housing property in a limited supply market that gradually increases the price of the real estate properties (Habibis, 2013). Hence, it is important for the Australian Government to take necessary steps in order to control price of house and land to ensure affordable housing for the younger generation. There are several macroeconomic reforms that can be made by the Australian Government to control the price of housing properties in the market. The study has been developed to present the macroeconomic reforms that can be implied by the Government of Australia in order to improve the affordability in the housing industry (Habibis, 2013). The study also focuses on explaining the impact of the macroeconomic reforms on the demand and supply of house in the market to know how these ref orms will affect the price and housing affordability among the younger generation. The three primary macroeconomic solutions are discussed herein below: Increase Credit to Acquire Property The first macroeconomic solution that can be undertaken by the Australian government is to increase the credit facilities to acquire property (Lee, 2009). For example, reducing tax on mortgage interest, reduce loan to value ratios and increase debt to income limits. The tax on mortgage interests must be reduced to minimise the cost of paying back the borrowed money. On the other hand, a higher amount of loan can be provided in comparison with the valuation of the house (Kroll, Mller, Haase, Fohrer, 2012). Furthermore, increasing the limit of an individual to take loan can also increase house affordability. In other words, reducing the expenditure to acquire loans and offering low interest loans to the younger generation people will increase the affordability of housing properties in the Australian market (Lee, 2009). First of all, young generation people will have a longer tenure of life and increasing the tenure of loans to around 30 years will reduce the EMI payments for the young generation people. On the other hand, increasing the debt to income limits will raise the amount of loan that can be taken from the market. Hence, lowering the interest rate and increase in the supply of money will boost the purchasing power of the younger generation in the Australian market. The Government of Australia must make necessary changes in the credit policy of the banks to increase the ability of the younger generation to acquire a property. Reduce Taxation on Capital Gains The taxation on capital gains acts as an add-on over the total price of the property. For example, a person purchasing a house or land needs to pay extra tax over the discounted value of the property. Hence, it increases the pressure over the young generation people to purchase a house or land because of the increase cost of acquiring a property (Mills, 2007). Hence, the government of Australia must reduce the taxation on capital gains to reduce the ultimate cost of acquiring a land or house (Lawrence, 2009). Now, using the demand law, it can be seen that the fall in the price will increase the quantity demand for the real estate properties. An explanation is provided in details using a graph herein below: Figure: Impact of reduction in taxation on capital gains Source: (Yates, 2007) It can be seen from the above graph that the final price or cost of acquiring a house reduces from P to P1. In this case, the demand curve remains at its place at D. Hence, the result of fall in the price is the increase in the quantity demanded for the housing properties. Hence, it can be seen that the reduction in the taxation on capital gains will gradually increase the quantity demanded for housing among the younger generation (Yates, 2007). But, it is important to keep in mind that the demand for house and land is inelastic in nature. Hence, the shift in the quantity demanded is quite less as compared to the change in the price. Therefore, it can be seen that this macroeconomic policy will be effective by a minimum level. Incentives to Increase Supply Another effective macroeconomic solution that can be used by the Australian government is to provide incentives to increase supply in the housing industry (Lee, 2009). For example, allowing more units of house in a particular land, building government housing and subsidising public transport to increase the supply of house and land in the market. Reducing the area of house by building more units of houses in a small land can increase the supply in the housing market (Mills, 2007). Furthermore, building government housing also leads to increase in the supply. Furthermore, subsidising and developing public transport in outskirt areas will reduce the cost of building a house that will further reduce the price. Hence, these policies can be used to increase the supply of house that reduces the price and results in increase in the quantity demanded (Lawrence, 2009). Hence, an increase in the housing affordability can be evident from the graph presented below: Figure: Impact of increase in Supply on Housing affordability Source: (Umeda, 2012) The increase in the supply will result in shift of the supply curve from initial supply to new supply in the long run. Hence, it will further result in the fall of price from P to P that will increase the quantity demanded from Q to Q in the market (Wulff Maher, 2008). Therefore, incentives to increase supply can be used by the Australian Government to ensure housing affordability among the younger generation. Hence, it can be seen from the above analysis that different macroeconomic solutions can be used by the Australian Government to ensure affordable housing for the younger generation. Providing lower interest loans, increase loan affordability, reducing taxation on capital gains and incentives to increase supply can be used together to see a better affordability in the housing industry in Australia for the younger generation. References Evans, A. (2014).Economics, real estate, and the supply of land. Oxford, UK: Blackwell. Gurran, N., Gallent, N., Chiu, R. (2016).Politics, Planning and Housing Supply in Australia, England and Hong Kong. London: Taylor and Francis. Habibis, D. (2013). Australian Housing Policy, Misrecognition and Indigenous Population Mobility.Housing Studies,28(5), 764-781. https://dx.doi.org/10.1080/02673037.2013.759545 Kroll, F., Mller, F., Haase, D., Fohrer, N. (2012). 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