Chapter 2 (Applied Economic Exercise)

1. As the price of houses increase, there will be a smaller number of people who will be able to afford the house (the income effect). In addition,higher prices might encourage people to look at alternatives such as renting or move to cheaper areas(substitution effect). Therefore, there is an inverse relationship between price and Qd

2. Factors that might have reduced the ability of property developers to increase supply:

  • Harder to access credit due to the Royal Commission
  • Governments restrictive land use regulations make it difficult to get planning permission

This meant that (prior to 2018) demand may have outstripped supply , creating shortages in the housing market and causing the price of housing to increase.

3. Two demand factors:

  •  Low interest rates
  •  Population growth (high immigration intake)

4. Research required — impossible to provide an answer for this.

5. Sample response: Australia has accumulated a large amount of debt since the GFC which may have resulted in a decreased capacity to increase future borrowings (this
is especially relevant for people who may want to buy a(nother) investment property.With reduced access to loans, the people are unable to increase demand (and in some
regions this might result in a decrease in demand for housing). When demand decreases this causes a surplus, so vendors might have to change their expectations and lower their selling price until a willing buyer comes along. During 2018 house prices fell by about 10% in Victoria and less homes were sold.

6. When property prices are falling it is usually a sign that supply is greater than demand. When auction clearance rates are low, this indicates that the auction achieved a highest bid (or no bid) that was below the reserve price. The vendor must then adjust their expectations if they want to sell the house so they often lower the price.

7. Lower property prices will have a negative wealth effect on those who have already gone into debt to buy the house (and also for those who own their property). In some cases, borrowers may experience a situation where there is negative equity. This could flow through to negative consumer sentiment and decreased spending in the
economy. This might cause some falls in demand for labour and reduce the ability of