Demand and Supply for Housing Market in Epping free essay sample

The objective of this report is to outline the reasons as to what of the difficulties facing Sydney’s property market and analyse how the relationship between demand and supply influence Sydney’s housing market. This report will also evaluate the recent and future trends in Epping housing market. The outcome of this report will be submitted to the local government in order to provide recommendations in ways to improve the Epping area housing market. Introduction and structure to the housing market. Sydney’s housing market focusing on Epping. The level of demand and supply in Epping 2. Recent and future trends in Epping housing market 3. Factors influencing demand side of Epping housing market 3. 1Increase in population affecting the demand in property market 3. 2Increase in interest rates affecting the demand in property market 4. Factors influencing supply side of Epping housing market. Advice and recommendations Summary of problems in the housing market, and the recommendation to the local government to increase supply of houses in order to alleviate the shortage faced in Epping housing market. Introduction and structure to the housing market A house is the biggest purchase that most people will make over their lifetime. The housing market in general would be considered to be that of a monopolistic structure, meaning that there are several number of suppliers with relatively unrestricted entry, and with a downward sloping demand curve providing suppliers with some control over price. The housing market is generally the same as any other commodity market and thus, adheres to the law of supply and demand. However, there are certain circumstances where it could differ, for example, ordinary commodity would rise in price if there is a shortage of supply and consequently consumers would purchase less at the higher prices set, but in the housing market higher prices could sometimes stimulate demand because consumers may decide that they should also purchase a property before further upward spiral in prices make them unaffordable. Furthermore, suppliers have the option of not selling their properties at any time and seek a better price or wait until a consumer comes at them with the right price. These kinds of occurrences may also happen in another type of asset commodity market, namely the stock market. This report will analyse Sydney’s housing market focusing on Epping by addressing: the housing market structure; levels of demand and supply in Epping; trends in the housing market; and factors influencing demand and supply in Epping. 1. Sydney’s housing market focusing on Epping With the difficulties that have surfaced with rising house prices and supply levels being at an all time low, Australia is facing an interesting economic time. The sample focus on this housing market study is a Sydney suburb called Epping. House prices in Australian major cities have been increasing at an annual rate of around 12%, and Epping, being one of the more affluent suburbs in Sydney can effectively illustrate this phenomenon. It seems that the levels of demand are outstripping the supply – meaning that the cost of housing will come at a higher price due to the shortage of supply/stock. 1. The level of demand and supply in Epping The median house price in Epping has risen roughly by more than 40% within the last 5 years, which illustrates that demand is definitely high. 2. Recent and future trends in Epping housing market One contributory factor for this high demand could be because of the trend in the current levels of immigration, which is arguably the highest since the 1960s. Immigration should contribute to both sides of the demand and supply sector, however one could argue that current increasing demand is not being met by the slower responding supply sector. This table supports the argument that immigration is on the up, and if supply on housing is not met, even higher property prices could well be expected. Another trend that may affect the housing market in Sydney or Epping for that matter could be the prices of shares in the stock market. Investors, depending on the prices of shares may help to push up or push down the prices of houses. As the graph below illustrates, in 2010 the prices of shares has been rather lukewarm, which could indicate that investors might choose to invest in the housing market instead, helping it to push prices up in areas like Epping. Thus, depending on the future trend of the stock market, the housing market may also be influenced by it. [pic] This graph shows the pattern of the last 5 years of the All Ords index http://markets. smh. com. au/apps/mkt/interactiveChart. ac? idx=XAO The future trend for Epping housing market seem to point to even higher property prices due to the proposed rail link between Parramatta and Epping. In the midst of the election battle, the now Prime Minister Julia Gillard made the pledge to inject 2. 1 billion dollars into the Parramatta–Epping rail link which should save commuters 25 minutes of travel time between Chatswood and Parramatta. Construction will begin next year and have a projected finish for 2017. This will be a significant project for the area in that it should have a desirable effect in terms of public transport efficiency and availability for those in the community who commute to and fro along the Parramatta link, which in turn may affect the property prices going upwards. Bureaucracy and inefficiency could also be another trend that is significant to the low housing supply. These are barriers limiting and slowing down state and local government planning and approval processes, which in turn limit the availability of new land to be built on. Many local councils are also unwilling to approve medium to high density ‘infill’ because of pressures from local voters 3. Factors influencing demand side of Epping housing market 3. 1Increase in population affecting the demand in property market The main determinants of the demand for housing are demographic. However other factors like income, price of housing, cost and availability of credit, consumer preferences, investor preferences, price of substitutes and price of complements all play a role. The more people in the economy, the greater the demand for housing. Epping is a great place to live. It has a major train station and many bus stops that provide access to the city. It has 19 parks covering nearly 6% of the total area. It has Coles providing supermarket needs and it is also in very close proximity to the Macquarie shopping centre. There are 5 schools located in Epping and there are also a number of famous selective high schools in its surrounding area. The population of Epping in 2001 was 17,854 people. By 2006 the population was 19,369 showing a population growth of 8% in the area. Households in Epping are primarily couples with children. Many people in Epping work in a professional occupation. The median sale price of houses in the area has increased from $425,000 in 2000 to over 1 million in 2010. . [pic] Above graph http://www. myrp. com. au free suburb profile for Epping As it became more popular, more and more people want to move into Epping. Hence Epping became more of the affluent suburb in the Hill district area. Its higher median house prices compared to its neighbouring suburbs confirms its status. [pic] Above diagram from http://en. wikipedia. org/wiki/Real_estate_economics The above diagram shows the effect of an increase in demand in the short run. If there is an increase in the demand for housing, such as the shift from Do to D1 there will be either a price or quantity adjustment, or both. For the price to stay the same, the supply of housing must increase. That is, supply SHo must increase by HS, to reduce the shortage. 3. 2Increase in interest rates affecting the demand in property market In order to reduce heat in the Sydney housing market, first home buyers were given assistance to help soften the entry into the housing market, along with the RBA lifting interest rates to 4. 5% from 4. 25%. And there is also growing speculation that interest rates will continue to increase next month. Due to the increase in interest rates, consumers would be reluctant to pay more in interest when buying houses. Thus demand would probably fall, but the quantity coming from the supply side may initially remain the same in the short term. As a result, the demand curve might shift to the left from D0 to D1, and the supply curve would maintain the same as before. The equilibrium point would fall along the supply curve from e0 to e1 (see Figure 3) [pic] 4. Factors influencing supply side of Epping housing market The supply of housing is always going to be quite sluggish. Due to the raising cost of building materials and land value, builders tend to decrease the number of buildings in order to reduce the immediate building cost. However the demand for buildings would initially remain constant in the short run. [pic] Above diagram from http://en. wikipedia. org/wiki/Real_estate_economics The diagram on the left shows the effects of an increase in costs in the short-run. If construction costs increase (say from CCo to CC1), developers will find their business less profitable and will be more selective in their ventures. In addition some developers may leave the industry. The quantity of housing starts will decrease (HSo to HS1). This will eventually reduce the level of supply (from SHo to SH1) as the existing stock of housing depreciates. Prices will tend to rise (from Ro to R1). Advice and recommendations: The housing shortage has become a national crisis, as more and more people want to live in major cities and in similar suburbs like the Epping area. This crisis for people who are looking for a house to live in is further complicated by the fact that they are also competing with investors buying up investment properties. Low-income earners have been hardest hit by the housing shortfall, they are paying more than half their income on rent. In order to increase the supply of housing market in this area, local government should release enough land for housing and lower the land building application fees to encourage builders to reduce building price and to increase building quantity. The news that the NSW government have implemented the ‘Comprehensive housing supply strategy’ is certainly good news. The NSW government have committed $44 million over 2 years to speed up the planning and approval process of housing and capped local council fees to lower prices. It is therefore advisable that the NSW government evaluate and monitors where that $44 million is going and whether it is being put into where it is needed most, because cutting red tape and creating efficiency is what is needed for now and the future. All major cities in Australia should take note of the lead taken by the NSW government in trying to eradicate the housing problem. A recommendation that could also help in the housing problem is the distribution of immigration. Suburbs like Epping might benefit if immigration could be redirected to regional areas to alleviate overcrowding in major cities. Perhaps the government could provide incentives for immigrants to live in regional areas.