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Macro-Economic Assignment Help
This is a solution of Macro-Economic Assignment Help in which we discuss on surging housing prices in Australia and its macro-economic solutions.
1. Australia is badly facing surging house prices and affordability is worsening day by day. The most recent affordability index of Housing Industry Association for the June quarter showed 3.7 per cent decrease in affordability. Millions of renters are no longer dreaming to become house owners & it’s true for 3.6 million Australians who prefer renting for life. As per the economists housing market in Australia remains overvalued severely and it is estimated more than 30% as of Q3 2015.At the same time risk of falling prices in future are there due to this significant over-valuation of housing prices. In Australia, where everybody is obsessed with the real estate, Core Logic statistics always showed strong growth regardless of actual market scenario. Australian Central bank drop using house price index from Core Logic as house price growth overstated in that index. There is 30% rise in Sydney house prices since 2012, whereas income & rent remain same over that period (Gurran & Phibbs, 2013).
In Australia rental yields down whereas rents are slightly rising. Lots of properties currently do not have the potential of earning rental return especially in Sydney and Melbourne. Negative gearing and 50% capital gain discount was intended to create more affordable housing but with the surging house price rental yields decline and for this more and more homes remain vacant.
The Reserve Bank of Australia (RBA) kept cash rate at 2% to support borrowing and spending and also for making monetary policy accommodative. In December 2015, the average standard variable interest rate for housing loans was 5.65% , the average discounted variable interest rate for housing loans stood at 4.85% and the three-year fixed interest rate for housing loans stood at 4.45.As per Central Bank in the housing market growth in lending to investors has become easy. Due to this low interest, there is considerable growth in Australian mortgage market of around 95% last year compared to 15% of GDP in the 1970s and 58% of GDP in 2002. Not only that, there is increase of housing loans for both investors and owner-occupiers. During third quarter of 2015, housing loans for owner-occupiers stood at AU$911.75 billion and housing loans for investors also increased to AU$526.08 billion.
In Australia, residential real estate are being purchased by foreign nationals, mainly Chinese. But acquisition by foreign nationals or corporations is subject to the approval of the Foreign Investment Review Board (FIRB) and foreign nationals get approval if there is availability of sufficient properties to the native Australians. Beside this, there is rapidly growing population, shrinkage of sizes of the houses and high immigration from 2004 to 2007. Residential dwellings are being built by private sectors for foreigners. Investor’s paid10% deposit and rest on completion which could involve obtaining bank loan in future. Previously also there was less construction of new residential dwellings in Australia due to stringent urban policies, tax burdens on builders and global credit crunch. As per International Monetary Fund (IMF), this is because of investor’s credit and interest only loans (Rossini & Kupke, 2014).
2. Improper housing policies play a significant role in bringing about economic as well as financial turmoil & they also hold true in case of recent surging housing prices in Australia. It is therefore up to the government to design appropriate housing policies that facilitate dwelling standards help in consolidating & establishing macro economics stability in the country. Government intervention is of paramount importance as it encourages equitable access to better housing opportunities in the long term. They can be in the form of fiscal policies like taxes, subsidies etc., making room for social housing & provisioning rent allowances and framing rules & regulations so as to govern as well improve the overall housing industry especially in the context of recent surging house prices in Australia. Housing in particular is a major driver of economic growth and development & is also known to influence people’s savings along with labour mobility which in turn impacts employment opportunities to a considerable amount. A well regulated & properly managed financial market along with establishing flexible & people centric housing policies, mortgage market etc., can certainly help facilitate macroeconomic stability to a great extent. Australia remains severely unaffordable and macroeconomic stability is prime component to address this issue. Macroeconomic stability means sustainable high rate of growth and this is dependent upon different structural measures as regulatory reform, improved governance, banking sector reform, trade liberation etc. If progressive distributional changes will be associated with growth, impact will be noticeable. Macroeconomic stability exists when major economic relationships such as relationship between domestic demand and supply, relationship between savings and investments are in balance. Under the macroeconomic solution government has to build resilient infrastructure focussing on affordable and equitable access for everybody and to boost economic development and well-being of people (Saunders, 2016).
To achieve sustainable growth, every country faces specific challenges .Here government has to play an important role by supporting macroeconomic policies along with structural reforms to enhance macroeconomic stability. It has to assess appropriate macroeconomic policy stance that needs to be adopted in this circumstance and also to choose specific beneficial macroeconomic policy instruments. The government helped first-time homebuyers, introducing a stimulus package in October 14, 2008 of AU$10.4 billion, worth around 1% of GDP. The First Home Owner Boost Scheme (FHOB) was included, and First Home Owner Grant (FHOG) rose from AU$7,000 to AU$14,000 for existing dwellings, and for newly built homes to AU$21,000.
In Australia rental yields down whereas rents are slightly rising. Here government has to set its own national targets taking into consideration national circumstances. Government will also need to decide how these targets will be incorporated in national planning processes, policies and strategies. A link between sustainable development and other economic, social and environmental fields should be established.
Another issue to be tackled by the government is where residential dwellings are being built by private sectors for foreigners. Investor’s paid10% deposit and rest on completion which could involve obtaining bank loan in future. But under the banking sector reform now all four big banks of Australia put restriction on lending for foreign buyers. Compared to high house prices rental income is insufficient to service the loan. In this case extra income bank requires from foreign sources, becomes risky in the challenging economic environment. Residential constructions are declining and this decline in housing construction is expected to result into shortage of affordable housing in the country, which investors at the bottom of the market will become renters instead of buying as he has to struggle with high rents. Further, the prevailing volatility in the housing market has been a major concern for the Australian government & therefore it should try to ensure proper housing supply that is price responsive & matches the demand pattern of the younger generation. It can be properly addressed if the construction licensing mechanism is streamlined facilitating optimum land usage, property assessment & taxation. The government can certainly garner greater success in its effort for providing affordable housing solutions to Generation Y through matching housing demand-supply relationship effectively (Stevens, 2016).
Economic growth remains modest, exports improving. Australia’s economic growth accelerated to 2.5% fuelled by increase in exports since 2000 and supported by the decision of the central bank to keep its major rates steady, as per figures from the Reserve Bank of Australia (RBA).
Economic growth was estimated at around 2.4% last year, as per the International Monetary Fund (IMF).
The target cash rate kept at 2% in December 2015 by the RBA, after cutting it by 25 basis points in May 2015.
The Australian dollar (AUD) depreciated to AUD1 = USD0.7306 in December 2015.
Australia’s export industry is showing improvement. In Q3 2015, the current account deficit of the country narrowed to about AU$18,104 million.
The nationwide unemployment rate dropped to 5.8% in December 2015. In Australia there were about 727,500 unemployed persons in December 2015, reduced by 3.6% from a year earlier.
Consumer prices increased by 1.7% in Q4 2015 compared to previous year.
Liberalization of financial analysis along with modifying the mortgage market can help facilitate credit supply to the young generation in Australia who wants to own housing properties through bringing about considerable reduction in the charges for available housing finance options. Credit restrictions certainly hinder possibilities for owning houses especially by the younger generation. Further the mortgage market regulations have also contributed in increasing the housing prices effectively. The Australian government should try to frame effective banking & mortgage regulation to support controlling rising housing prices making them easily available for the Generation Y. Mortgage market in Australia continues to grow from around 15% of GDP in the 1970s, to around 95% last year due to low interest rates (Meng, et al, 2013).
Local governments along with partner organizations and agencies can take desperate initiatives into valid opportunities for better livelihoods. Two pre-requisites are — political will and popular support for community organizations and other local body. National governments create the space for local government authorities to act and provide resources. International agencies may also provide the required technical as well as financial support for accomplishment of national goals. The government should try to bring in housing policies that are not only effective but also reasonable. They can achieve that through removing various tax alterations that exist in housing. Although non-taxable imputed rent facilitated house owners but the taxable mortgage interest tend to oppose the growth & development of housing market among the younger generation in Australia. The government should therefore try to eliminate mortgage interest & increase recurrent taxes on property to fuel housing growth effectively. Moreover, the Australian government can encourage residential mobility facilitating labour market conditions of the younger generation through proper and effective housing supply which in turn will reduce housing prices in Australia. Credit availability also facilitates growth in residential mobility and help in obtaining easy housing finance & greater housing alternatives. Further, framing more stringent rent regulations that hinders tenant-landlord relationship can also serve as an avenue for housing growth among younger generation (Bishop, et al, 2013).
Bishop, J., Kent, C., Plumb, M., & Rayner, V. (2013). The Resources Boom and the Australian Economy: A Sectoral Analysis'. RBA Bulletin, 39-50.
Gurran, N., & Phibbs, P. (2013). Housing supply and urban planning reform: the recent Australian experience, 2003–2012. International Journal of Housing Policy, 13(4), 381-407.
Gurran, N., & Phibbs, P. (2016). 'Boulevard of Broken Dreams': Planning, Housing Supply and Aff ordability in Urban Australia. Built Environment,42(1), 55-71.
Meng, X., Hoang, N. T., & Siriwardana, M. (2013). The determinants of Australian household debt: A macro level study. Journal of Asian Economics, 29, 80-90.
Rossini, P., & Kupke, V. (2014). Understanding the short-and long-run relationship between vacant allotment and established house prices: A case study of Adelaide, Australia. International Journal of Managerial Finance, 10(2), 200-217.
Saunders, P. (2016). Housing costs, poverty and inequality in Australia. Housing Studies, 1-16.
Stevens, G. (2016). After the boom. Ecodate, 30(2), 13.