HOME HOUSING MARKET IN AUSTRALIA

Q1)

The trend of the home housing market in Australia over the past 30 years has shown steady

increase in house prices, with occasional periods of decline. Between 1990 and 2020, the median

house price in Australia has increased from around $111,524 to over $685,000. The period from

2012 to 2017 saw the highest annual growth rates in house prices, with a peak of 11% in 2015.

However, in recent years, there has been a slowdown in the rate of growth, with some areas

experiencing decline in house prices.

Q2)

i) Renting becomes more expensive, so more people may consider buying a house a more cost-

effective option. This will shift the demand curve to the right, resulting in more houses being

sold. This results in no change in the supply curve. Therefore, both the equilibrium price and

quantity will increase.

This scenario can be illustrated in the diagram below:

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According to the diagram above, D1 represents the original demand curve and S1 represents the

original supply curve, respectively. There is a shift in the demand curve to the right when the

rent rises as a result of an increase in rent costs (Figure 2). The new equilibrium prices are P1

and P2, the new equilibrium quantities are Q1 and Q2, and the new equilibrium prices are P1 and

P2.

ii) Increasing mortgage interest rates have resulted in an increase in the number of borrowers

who are having difficulty making their mortgage repayments as a result. It is expected that more

people will sell their houses, resulting in an increase in the supply of houses on the market,

which will shift the supply curve to the right and cause prices to rise. As a result, the demand

curve remains the same. Thus, a shift in the supply and demand curve will decrease the
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equilibrium price, while a shift in the equilibrium quantity will either increase or decrease the

equilibrium quantity.

This scenario can be illustrated in the diagram below:

This diagram above shows D1 and S1 to represent the original demand and supply curves,

respectively, which were presented in above diagram. There is an increase in mortgage interest

rates, which causes a shift in the supply curve to the right, where S2 is shown. The new

equilibrium price is predicted to decrease from P1 to P2, while the equilibrium quantity will

increase.

iii) Whenever people expect housing prices to fall, they may delay their purchases or sell their

houses, which will decrease the demand for houses on the market, which will shift the demand
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curve to the left, which will cause housing prices to fall as well. As a result of this, the supply

curve remains unchanged. As a result, both the equilibrium price and equilibrium quantity will

decrease.

This scenario can be illustrated in the diagram below:

In the diagram above, D1 represents the original demand curve, while S1 represents the original

supply curve. There is a shift in the demand curve to the left when people expect that home

prices are going to fall, resulting in D2. The new equilibrium price decreases both equilibrium

quantity and equilibrium price from Q1 to Q2, while the equilibrium quantity decreases from Q1

to Q2.

iv) Housing builders going into liquidation because of expensive materials, labour shortages, and

shipment delays will result in a decrease in supply, shifting the supply curve to the left. Demand
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curves are unchanged. Prices will rise, while quantities will decrease or increase based on supply

and demand shifts.

This scenario can be illustrated in the diagram below:

In the above diagram, it can be seen that D1 represents the original demand curve while S1

represents the original supply curve. There are several large housing builders that go into

liquidation, which results in a shift in the supply curve to the left. The equilibrium price has

increased over the course of the period P1 to P2, but the equilibrium quantity has decreased over

the course of the period Q1 to Q2.

v) There will be an increase in demand for houses in the Australian market as a result of strong

population growth. There is no change in the supply curve. As a result, an increase in

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equilibrium price will result as well as an increase or decrease in equilibrium quantity depending

on how much the supply and demand curves are shifted in either direction.

This scenario can be illustrated in the diagram below:

This diagram shows what the original demand curve D1 looks like, and the original supply curve
S1 look like, as shown in the diagram above. During periods of strong population growth in
Australia, demand curves tend to shift right to the D2 level. There is an increase in the
equilibrium price of P1 as compared to P2 in the new equilibrium, as compared to Q1 in the
current equilibrium.
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References

Gans, J., King, S., Stonecash, R., Byford, M., Libich, J. and Mankiw, N. G. (2018).

Principles of Economics: Asia-Pacific Edition, 7th Edition. Cengage

Learning Australia.