ECONOMICS FOR MANAGERS

[Student Name]
[Student Institute]
Question 1:
In your own words, summarize the article, “Australian Housing Market Review,” by
Arnhem Investment Management, November 2012. In particular, what are the main
messages of the article?

Housing has the significant influence on the way we are living our lives and the way we are
spending our money. For most home owners their houses is their most significant asset and is the
biggest financial decision most individual will make throughout their lives (Beer & Faulkner,
2011; Lindeman, 2010). The residential property investment is the only around five percent of
Australian gross domestic product which is indirectly influencing other parts of the economy and
demonstrating opportunities within the stock market (Arnhem, 2012; Beer & Faulkner, 2011).
Utilizing the United States market as the guiding principle the housing services account for
twelve percent of gross domestic product which resulted in the housing sector in the aggregating
through major driver of the economy (Kuttner & Shim, 2013; Beer & Faulkner, 2011). The
Australia demographics trending are significant long term drivers of housing demand and in the
turning prices of it (Wilson, 2014). One of the better indicators of long term house prices in
numerous countries has demonstrating the growth in the individual aged 20 to 44 which has the
age group which is the major house purchasing segment (Forrest & Yip, 2012; Bardhan, et al.,
2011). The Australia has experienced strongest population progression which has in the part been
driven by total migration which is contributed to household developing and housing demand
(Kuttner & Shim, 2013).
The population growth will be efficient but this is partly offset by weakening
demographics , with Australia population enhanced by around 350,000 per annual and around
2.66 individual per household. While , demands of the houses at the similar way as individual
per household has demonstrated a reversal in the long run trending where housing requirement
which is sensitive to the ratio (Lindeman, 2010). Our argument hence is that housing demand in
Australia , however predictable to enhance modestly may well disappoint most market
forecasting, for market forecasting to be correcting the individual per household ratio would have
to relapse back to its previous downward trend (Tomlinson, 2012). The disappointment in
initiating would have negative implications for the earning forecasting and valuations for
companies operating in the household construction, building products , department store ,
household goods , mortgage lending , Electricity retailing as well as home insurance micro
industries (Forrest & Yip, 2012).

Most evaluation on the comparative affordability of the Australian house market fails to develop
the adjustment for the different quality and sizes of houses. It is predictable that excluding
several Asian countries where population densities have emphasized individual into smaller
housing , some governments that are forcing the size of houses downwards (Willis, et al., 2009).
Some of these aspects are financial deregulation, enhanced global constancy and accessibility of
credit (Forrest & Yip, 2012; Arnhem, 2012). Putting to one side these global factors, one feature
that has been definite to the Australian market has been growing house size. Affordability is in
element a driver of insist, but we considered it to be of adequate concentration to evaluation as a
separate item (Bardhan, et al., 2011). Whereas, we frequently hear that prices have turn out to be
unaffordable, the fact that we have not experienced a important price improvement would go
some way to invalidate that disagreement (Willis, et al., 2009; Willis, et al., 2009). Australia is a
extremely unbiased society by international principles, with a cultural predilection towards living
close to central business districts and coastal cities. This limits pleasing land area in an otherwise
large land mass country such that Australia is capital city house price to income ratios that are
similar with coastal city metrics internationally (Tomlinson, 2012; Forrest & Yip, 2012). The
result of a real estate bubble collapsing is thoughtful as lately perceive in offshore markets. There
is a strong two-way reaction loop between house prices and financial constancy (Beer &
Faulkner, 2011). Housing market booms followed by busts have been connected with financial
system unsteadiness historically, including in Sweden in the early 1990s and the USA, the UK,
Ireland and Spain during the current global financial crisis (Gurran, 2011).

Extreme struggle and destructive lending usually in the wake of financial sector deregulation
which highlights financial intermediaries to compete for market share by means of lower credit
underwriting standards (Beer & Faulkner, 2011; Lindeman, 2010). The international monetary
fund argued that relaxed lending standards and enhanced house leverage were interlinked with
enhanced house price inflation and in response to it stronger house price reduced and financial
stability issues during the ruined (Willis, et al., 2009).
 When appearing at mortgage asset quality , it is significant to differentiate between the
losses and non performing loans while only the fraction of loans that were non performing loans
resulted in losses which is because of conservative nature of Australian banks (Forrest & Yip,
2012; Wilson, 2014). The enhancement in Nonperforming loans in the last several years has been
comparatively enhanced among non banks even though there has been deterioration in the bank
mortgage asset quality. The unemployment is the major issue related to debt servicing but we
understand that this will remain at the manageable level (Arnhem, 2012; Bardhan, et al., 2011).
The banks also have some safeguard from property losses because of the mortgage insurance
where there are regulatory incentives to utilize lenders mortgage insurance (Kuttner & Shim,
2013; Lindeman, 2010). Where there are regulatory incentives to utilize lenders mortgage
insurance while the major banks need mortgages with the LVR > 80 percent on the standard
mortgage or the LVR > 60% on the low doc mortgage to take out mortgage insurance (Forrest &
Yip, 2012; Kuttner & Shim, 2013). The Australia APRA imposing the higher capital charge for
mortgages with the LVR > 80% that are not insured. The mortgage insurers are regulated by
APRA and they are needed to the capitalized for up to 40 percent declining in the house prices.
The Long term demographics are significant and Australia appearing comparatively well placed
because of immigration and the fertility rate of around 2 where China and Japan appear
specifically miserable on the basis of the measure (Forrest & Yip, 2012; Willis, et al., 2009). The
Australia has not experienced the high level of overbuilding where it is argued that Australian
houses are among the largest in the world. It is also observed that negative for mortgage
providers and insurers at the margin where organizations in those micro industries are making
major profits from servicing existing housing stock so there are less negatively influenced
(Tomlinson, 2012; Willis, et al., 2009).

Question 2:

Using appropriate diagrams, figures and data to answer: Are the Melbourne’s housing
prices overvalued? Why or why not?

The investors are required to prevent the growing housing market from the crash where several
economists argued Australian house prices are overvalued but few argued that market is
suffering the bubble and predictable to crash. The mid-year survey of twenty five leading
economists asked if the Australians home prices were overvalued and whether it is posed the
issue for the economy. The hot property market of Sydney has viewed values increase sharply
over the year to June by 15.4 percent. Since, May 2012 they appeared a whopping 23.1 percent
gain. While, the Melbourne values were not far behind up to 9.4 percent (Lindeman, 2010;
Forrest & Yip, 2012).

Melbourne growth has demonstrated strong and considerably the plentiful supply and supply
where the level of new unit construction. It has the lowest rental yield which is demonstrated
being 3.2 percent on houses , 4.2 percent on units which is the economist that has utilized for
suggesting the market is overpriced (Tomlinson, 2012; Wilson, 2014). The Melbourne housing
markets that are driving these two tier conditions, the Melbourne values are about by 19.5
percent where Melbourne were the strongest performing cities during the 2009 and 2010 growth
cycle. Melbourne is something of enigma which is the plentiful supply of new land and home
packages particularly in the west and the level of innovative apartment construction for the inner
city location is higher enough for causing the predictably debate regarding whether several are
being constructed. If supply is superior than demand then Melbourne price growth is required to
be passive. The fact that it carries on at a strong rapidity proposing that demand is increasing
faster than supply (Willis, et al., 2009; Gurran, 2011).

Question 3: Suppose that the Melbourne’s housing market is perfectly competitive (i.e., many
real estate developers).

The city government decides to levy a buyer’s tax (specific tax) on housing purchases.

(a). Examine the impacts of this buyer’s tax on the equilibrium housing prices,
consumer surplus, producer surplus, and total surplus (or social welfare).

There is an increasing application at non price differentiation by means of specialization in the

building industry that are consistent with what would be expected in the market with the
monopolistic competition structure. In the forms of markets with the increasing number of
competitors comparative to the number of consumers , vigorous competition retraining prices
(Forrest & Yip, 2012; Kuttner & Shim, 2013). The scope availability for competitors to innovate
and specializing so as to gain the advantage in the marketplace does permit for particular
participants in the market. For example , the slope block builder and heritage home builder
discussing earlier in the article for gaining the advantage over their competitors by means of non
price differentiation including good reputation and better class of service. The capability for
suppliers in the monopolistic competition market for differentiating themselves in the manner
demonstrating that monopolistic competition may actually be the best market structure for
consumers in several industries (Tomlinson, 2012).

In the circumstances of perfect competition, perfectly elastic demand demonstrates that suppliers
that are not capable to develop adequate profits to sustain innovation. on the other hand, while
oligopolies and monopolies permitting for even greater innovation in comparison to
monopolistic competition, lacking of competition driving up prices, potentially to a level more
than consumers that would prefer to pay off (Forrest & Yip, 2012; Bardhan, et al., 2011).

(b). Can an increase in the buyer’s tax raise social welfare?

One of the more motivating developments in the Melbourne property market of late that has been
the increase of the specialist builder. In the previous days, customers are looking for home
builders in Melbourne that have had comparatively few aspects to differentiate between their
alternatives. While, builders are growingly providing specialist and niche services. For examples,
a sloping block builder may compete based on their capability for better serving customers with
sloping blocks (Arnhem, 2012; Bardhan, et al., 2011). A heritage home builder possessing a
distinctive marketing benefit among customers looking to develop their standing new houses in
Melbourne in a form that remains deferential to the architectural and social history of the areas in
which their houses are built (Lindeman, 2010; Tomlinson, 2012). This process of enhancing
differentiation among house builders in Melbourne which is good news for potential buyers,
growingly consumer option and decreasing down prices as builders are capable to use specialist
knowledge to restrict prices (Forrest & Yip, 2012; Beer & Faulkner, 2011).

(c). Can an increase in the buyer’s tax raise city government’s revenue.
The Melbourne late winter market draws to the close and increasingly swift approaches signs
that are enhancing that buyers and sellers may be reemphasizing on the warmers months ahead.
Melbourne weekend auction market retreated last weekend recording in its lowest clearance rate
where 72.7 percent resulted was below the previous weekends of 75.6 percent rate and only
higher more than the 71 percent recorded over similar weekend few years ago (Gurran, 2011;
Kuttner & Shim, 2013).

Although, in the past few years the weaker results have broken the trend of increasing clearance
rates over the past months while the rate was another way of comparatively solid results for the
market that has proven to be specifically resilient not only over winter but also for most of the
year (Lindeman, 2010; Kuttner & Shim, 2013). The local incomes growth remaining which is
constraining the capability of buyers towards increasing bid up prices in the marketplace. With
the increasing growth of real wages along with the continuous and the influence of the sharp
falling in the interest rates over the past two years decreasing the Melbourne prices growth that
will be increased to continue to decrease specifically as unemployment continues to increase
(Lindeman, 2010; Kuttner & Shim, 2013).

Question 4:

Suppose that city government decides to develop a new housing area (i.e., the city
government is like a monopolist).

Using appropriate diagrams to answer:

(a) If the city government’s objective is to maximize profits, what would be the housing
price set in this new area?

The natural monopoly is the distinctive type of monopoly that may increase when there are
increasingly high fixed costs of distribution including when the large scale infrastructure which
is needed to make sure supply (Tomlinson, 2012; Beer & Faulkner, 2011).

So, as to maximize profits the natural monopolist would charge and making super normal
profits , if regulating and privately owned where the profits are predictable to be unnecessary.
The monopolist is predictable to be allocatively and effectively incompetent. While , profit
maximization occurs when marginal cost becomes equals to the marginal revenues (Beer &
Faulkner, 2011; Kuttner & Shim, 2013).

(b) If the city government’s objective is to maximize revenue, what would be the housing
price set in this new area?
The revenue maximization can occur when marginal revenue turned out to be zero and sales
revenue has been increased as demonstrated in the figure above.

(c) If the city government’s objective is to maximize welfare, what would be the housing
price set in this new area?

At the most fundamental way , market that are the way for allocating resources that are well
regulated and may have competitive market can enhance consumer welfare and by enhancing
economic growth that also enhanced with total welfare. When markets work fine then housing
market flourish by giving what consumers are interested better and most cost efficient in
comparative to their competitors (Kuttner & Shim, 2013; Willis, et al., 2009). The efficient
competition gives most fundamental benefits for consumers by means greater options , lower
prices and effective quality goods and services. The competition also gives strong incentives for
firms to be more effective and innovative hence assisting increasing productive growth across
the economy (Forrest & Yip, 2012; Gurran, 2011).

Question 5:

Find at least three countries or economies that have housing policies or measures to
stabilize the housing markets.

The recognition of interest rates restricting that has left policymakers searching for other policy
tools to domestic housing and other asset markets which is either independently and as the
complement towards interest rate policy (Bardhan, et al., 2011). There is an increasing trend of
non interest rate policies including reserve needs and enhancing loan to value ratios that have
been on high and growing requirement in several economies (Kuttner & Shim, 2013; Lindeman,
2010).

The major objectives of the macro prudential policies are for promoting the resilience of the
financial system by mandating the increasing levels of liquidity , capital and collateralization for
restricting the building up of financial imbalances by decreasing credit and asset price growth
(Bardhan, et al., 2011; Arnhem, 2012). There are countries such as Australia , China , India ,
Indonesia , Japan , Malaysia , New Zealand , Singapore and Thailand (Beer & Faulkner, 2011;
Lindeman, 2010). They have demonstrated the policy measure including maximizing LTV and
DSTI ratios and restricting on foreign currency lending that are efficient in decreasing leverage ,
asset and non core to major liabilities growth during booms and that have few policies assisting
stop declining in bank leverage and assets during downturns. The increasing DSTI ratio is the
policy tools that most consistently influences housing credit growth with the usual policy
lessening decreasing housing credit growth by four to seven percent. It is also argued that the
enhancement in the housing related taxes can decrease down the growth of housing prices,
although this finding is to some extent sensitive to the option of econometric technique
(Lindeman, 2010; Kuttner & Shim, 2013).

Provide your views or suggestions on the best measure to stabilize the housing markets that
could be considered or used in Melbourne.

The Australian property prices are predicted to even out after last year growth in Sydney and
Melbourne in accordance to the research arm of online real estate portal on the house (Forrest &
Yip, 2012). Melbourne increase the value by ten percent however perth prices increased by 9.25
percent in accordance decreasing consumer sentiments and affordability concerns that are
expected to participate to the drop off in dwellings price growth over the next coming five years
(Beer & Faulkner, 2011).

The three major policy tools aimed at housing credit supply that are provisioning needs , risks
weighting and exposing limits (Bardhan, et al., 2011; Forrest & Yip, 2012). The first two are
identical to reserve and liquidity needs in the sense that they influence bank loan supply by
means of cost of funds (Gurran, 2011; Forrest & Yip, 2012). The difference is that it applies
particularly to housing credit and resulting to classify them as targeted credit policies (Forrest &
Yip, 2012; Willis, et al., 2009). In comparison to exposing restricting influence the housing
credit supply that are not through the cost of funds but by means of the quantitative restricting on
the banks supply of housing loans (Tomlinson, 2012; Bardhan, et al., 2011).

By restricting the revelation of banks towards the housing and property sector that are percentage
of the total assets and liabilities which is the aim of slowing down rapid expansion of housing
loans by banks. A restriction on housing loan experience is sometimes positioned as a convinced
percentage of a bank equity (Forrest & Yip, 2012; Tomlinson, 2012).

Reference
Arnhem, 2012. MARKET DRIVERS, LONG-TERM PRICING INDICATORS AND
INVESTMENT IMPLICATIONS. Australian Housing Market Review, 1(3), pp. 1-23.

Bardhan, A., Edelstein, R. & Kroll, C., 2011. Global Housing Markets: Crises, Policies, and
Institutions. s.l.:John Wiley & Sons.

Beer, A. & Faulkner, D., 2011. Housing Transitions Through the Life Course: Aspirations,
Needs and Policy. s.l.:Policy Press.

Forrest, R. & Yip, N.-M., 2012. Housing Young People: Transitions, Trajectories and
Generational Fractures. s.l.:Routledge.

Gurran, N., 2011. Australian Urban Land Use Planning: Principles, Systems and Practice.
s.l.:Sydney University Press.

Kuttner, K. N. & Shim, I., 2013. Can Non-Interest Rate Policies Stabilize Housing Markets?
Evidence from a Panel of 57 Economies. Journal of Economics, 1(3), pp. 2-34.

Lindeman, J., 2010. Mastering the Australian Housing Market. s.l.:John Wiley & Sons.

Tomlinson, R., 2012. Australia's Unintended Cities: The Impact of Housing on Urban
Development. s.l.:Csiro Publishing.

Willis, E., Reynolds, L. & Helen, K., 2009. Understanding the Australian Health Care System.
s.l.:Elsevier Health Sciences.

Wilson, A., 2014. Melbourne housing market slowing as spring approaches. The Domain Age,
1(1), pp. 3-14.