StudentShare
Contact Us
Sign In / Sign Up for FREE
Search
Go to advanced search...
Free

Home Value Growth, Investment in Housing Finance - Assignment Example

Cite this document
Summary
The paper "Home Value Growth, Investment in Housing Finance" is an outstanding example of a macro & microeconomics assignment. According to the report, home values have been increasing since the end of the financial crisis in December 2008, with Sydney and Melbourne accounting for accounting mostly for the increase…
Download full paper File format: .doc, available for editing
GRAB THE BEST PAPER92.9% of users find it useful

Extract of sample "Home Value Growth, Investment in Housing Finance"

Name: Lecturer: Unit name: Date of submission: QUESTION ONE QUESTION ONE Home Value Growth According to the report, home values have been increasing since the end of the financial crisis in December 2008, with Sydney and Melbourne accounting for accounting mostly for the increase. Home values in Sydney and Melbourne have increased by 52% and 46% respectively, and the rest of the cities are much less. Cumulatively home values have by 34% in Australian capitals. (RP Data) Regarding annual changes in home values, we can rank them as follows Sydney, Melbourne, Brisbane, Adelaide, Perth, Hobart, Darwin, and Canberra with 14.3%, 8.2%, 6.4%, 5.8%, 3.3%, 4.6%, 7.2%, and 1.7% respectively. The rise of 9.3% for all Australian capitals combined (RP Data). Home value growth is a good thing to investors since their investment value increases and but also can lead to price overshooting, and this should be kept in check by the government (Betts). Transactions The rise values of the home are accompanied by the rise in the number of transactions. On July 2014, sales were 9.8% higher than it was in July 2013 and the total sales for the year 2014 were higher than for year 2013by 9.8% (RP Data). Concerning sales, Melbourne and Sydney achieved the highest than Darwin and Canberra, which recorded lower sales. However, Hobart and Brisbane realized higher growth in sales accounted by the high rate of increase in transaction activity. The increase in transaction activities is as a result of capital growth in these cities. Initially, Hobart and Brisbane lagged in capital growth, but now the rate of growth in transactions is high due to capital formation. Capital growth in Hobart and Brisbane means that the two cities are picking up for heavy capital investments, this indications means that there are new prospects for good investments in the two cities (Betts). Rental Growth For 12 months to September 2014, rental growth has increased by 3.1% compared to 2.1 % for 12 months toSeptember2013 (RP Data). However, the average growth for five years is 3.9% that is much higher than the annual growth for the past two years. For investors to be encouraged to continue with property investments, the housing sector productivity should be high. The city government can ensure this by proper planning, waiving some unnecessary costs to developers and issuing of tax incentives and subsidies (Betts). The Australian market has seen home values rapid growth that leads to increasing in housing prices. Although this is good to property owners, it can go along in hampering productivity in the long run. This is because, as prices overshoots, no customers are willing to occupy new houses due to high prices; they will then vote with their feet and opts for low-cost housing. Then, what happens to already established housing areas? They collapse, no rental yields and hence no productivity at all. In this case, price controls become an important action to ensure continued productivity of the housing sector (BRAMLEY, LEISHMAN and WATKINS). Inflation Rental growth for Sydney, Hobart and Melbourne has outperformed inflation, but Perth and Canberra failed to outperform inflation for the last one year. When analyzed individually rental yields have fallen over the last one year in all cities (RP Data). Prospects of any rental growth are limited in the short run, and this can lead to softening of the rental yields over the next coming year. However, if measures are put to tame inflation, rental yields will be likely to improve and hence encourage more investment that in turn leads to expansion of the economy (Doling). Investment in Housing Finance Investors have increased the investments in the housing finance sector from $8.2 billion in the year ending September 2013 to $10.6 Billion for the year ending September 2014. For the last one year, investments in housing finance have average39% of all housing finance commitments which is an all-time high lending to the sector. Across the states, lending to housing finance has also increased with New South Wales leading with an investment lending of $4.5 Billion. For Victoria, Queensland, South Australia, Western Australia, Tasmania, Northern Territory and Australian Capital Territory it was much more moderate. By looking at the statistics from state to state, lending out of loans has increased so much. On August, investors committed $4.5 Million in New South Wales but on the national front, the activity remains relatively low (RP Data). QUESTION TWO The Melbourne’s housing prices Yes, Melbourne prices are overheated, according to Australian Housing Market Report the values of homes have risen at a substantially high rate not only in Melbourne but also in other major Australian cities. Over the last 12 months, for example, Melbourne recorded an increase of 7.1% in home values and an increase of 46% since the end of the end of 2008 financial crisis. However according to the report, home value growth outweighs the rental yield and as a result of these homeowners, to improve rental yield will increase home prices. Higher home prices may lead to inflation that is detrimental to Australian economy (Dovey). According to the report, Melbourne and Sydney have the lowest gross yields of 3.4% and 3.8% respectively, notwithstanding that these are gross yields and removal of additional costs may make the yields even lower. Investors and banks are shying away from housing investment due to fear of the consequences of price overheating as this will likely to create an overhang where houses will be vacant leading to no rent yields for developers to repay bank loans and pay dividends to investors (Dovey). Therefore, the Australian government should come up with policies to tame surges in housing prices. Otherwise, it might be detrimental to the economy. QUESTION THREE The difference between the price the consumer is willing to pay and the market price represents consumer surplus. While, Producer surplus is the difference between the price producers would like to receive for a good or service and the marginal cost to produce (Fallis).To assess the impact of specific tax, buyer’s tax, on the consumer, producer and total surplus we will use the figure below P1 and Q1 are the equilibrium housing prices and quantity before imposition of the tax. When a per unit tax, T, is imposed, the price charged to consumers rises to P3 and consumer surplus fall by B+C. Apart from lowering the consumer surplus, the tax will also lead to the fall in housing price to producers from equilibrium price P1 to P2. The producer surplus will fall by D+E. The city government will collect revenues equivalent to the sum of area B+D, which is given by multiplying Q2 by the amount of per unit tax, t, that is Q2*T. C+E represent the deadweight loss, the loss in consumer surplus, C and producer surplus E that’s not collected by the government as taxes. Therefore, an imposition of a specific tax does not improve social welfare since it will result in a deadweight loss (Jaffee and Rosen). Relationship between buyer tax and social welfare Assuming an initial tax of T, and the government decide to increase buyer’s tax to 3T as shown in the figure below. An increase in buyer’s tax leads to an increase in price to be paid to consumers leads to a decrease in price to suppliers (Manzi). Consumer surplus will fall by the area A+B and producer by area F+G. Area A+C+F will be transferred to the government as the tax revenue. However, area B+D+G will be lost since it is not transferred to the government as revenues leading to an increase in deadweight loss by B+D+G from initial deadweight loss of area E, therefore total surplus reduces implying an increase in buyers tax does not raise the social welfare. Effect of buyer’s tax to city government’s tax revenue An increase in buyer’s tax initially, increases government revenue up to a certain point where a further increase in tax begins to eat up the revenues of the government. At this point, taxes cause more harm to the economy than the benefits, this is because the deadweight loss will be so large (Manzi). Therefore, the city government should take caution about any tax increase this may be so much detrimental to the economic; it is known as the Laffer curve phenomenon. QUESTION 4 Profit Maximising price A monopolist maximises its profit by setting its quantity such that its marginal revenue equals its marginal cost, and the resulting price will be profit maximising. The city government, acting like a monopolist, will set the number of housing units in the new housing area such the revenue from one additional housing unit will be equal to the cost of setting up that extra housing unit. In the figure below the optimal quantity and price are Q* and P* respectively (Manzi). Revenue Maximising Price The Revenue maximising price will be the same as revenue maximising price, and therefore, the city government will set the price at a poinT where MR=MC, therefore it will set the price to be P* same as above. Welfare maximising price A welfare maximising price is one that minimises the deadweight loss od a monopolist. For city government to maximise the social welfare of the housing area it has to set the price of each housing unit at a price equivalent to P2 since at this price, there is a zero deadweight loss (Manzi). QUESTION FIVE Stabilization of housing market Housing being a basic necessity plays a key role in the economic development in the economy of any given country and for this reason, the government are very keen to encourage investments in this sector (Manzi). In most of the countries, real estate accounts for the largest component of wealth. For example, in the United States of America, Housing investment accounts for almost a third of the total assets in the non-financial sector. Many people prefer holding wealth in the form of their home houses rather than any financial asset. This is evident in France where most of the household, that is nearly 60% are homeowners but roughly a quarter of them own stocks. Enactment of strong servicing standards A good mortgage servicing program ensures transmission of monetary policy and also helps tge economy adjust to shocks. New York has passed rules that ensure that mortgage firms offer better terms and conditions to housing developers. When mortageees services their mortgages on time, the mortgager will be able to give out another mortgage hence ensuring there is multiplier effect leasing to the economic expansion (Yang and Yang). Chepa mortgages encourage the developers to come up with numerous housing projects. Cheap mortgages also ensure housing developers are in a position to meet their obligations of servicing mortgages. Price floors Some countries have experienced an unprecedented rise in housing prices due to the unregulated housing sector, in a case where landlords are the price makers, they set unreasonably high prices so as to make normal profits. These makes the housing prices to be very high and hence not affordable to the low income and middle-income citizens of a country (Manzi). To make it possible for middle and low-income earners to access housing, which is considered a basic necessity, the government should do something. One of such actions is to institute a price control regime and in particular, price floors. Price floors are where the government set a maximum chargeable price property owners can charge. In Kenya’s capital, Nairobi, the government has set up maximum housing prices so as to prevent overshooting of prices. Higher housing prices prevent the low-income consumers from accessing affordable housing. Price floors will remedy this situation. Encouraging the rehabilitation of vacant houses Shortage of housing units is at times caused by not old houses that are not well maintained, and this leads to movement of occupiers seeking for better houses. It leads to a shortage in houses and hence higher prices. To avoid this, the city government should ensure old houses are renovated so as to inhabitable.The loss is passed by the city government to dictate how old houses should be handled. In Kenya for example, the city government, upon realising that a house is in a bad condition, issues a notice to both the tenants and landlords to vacate and renovate the houses or if depreciation is beyond that which it can rehabilitate, the government orders for its destruction (Manzi). This is an effort to ensure that inhabitants of that residential houses are saved. Financial Incentives such as Subsidies four developers. By subsidising cost of housing development, investors and real estate developers will be encouraged to undertake many housing projects hence ensuring that there is a steady supply of housing units, and hence the prices will be stabilised. Stability of housing prices is beneficial to the economy as it will not raise the price levels that might cause inflation.The city government can also develop low-cost housing projects for government workers who earn low wages (Nordvik). In most developed countries, they offer financial incentives to housing developers such as Cora Area Rehabilitation and redevelopment grant program, tax increment financing commission, and tax increment financing program in Canada. They also waive some planning and development fees such as permit application, demolition and building permit fees. In Ottawa city, the incentives offered include reducing tax and regulation barriers, reductions in development cost and establishing bylaws designating house projects as a municipal capital facility. Setting up an agency to ensure that housing construction meets required quality. Most developed countries have set up agencies that ensure houses constructed meet the required standards set by the government. In Kenya, for example, National Construction Authority approved and inspects the construction of houses to ensure strictly stipulated standards are met by housing developers. Substandard houses may cause a lot of harm than good because it may lead to house collapse, therefore, leading to loss of lives. Apart from this, the consumers will be paying a higher price for a poor quality house, and this will make them not to maximise their utility (Nordvik). The utility of consumers is an important and every government should ensure that it’s citizens should get value for their money. Ensuring equitable access to housing for all Price overheating may be as a result of the prevailing market forces of demand and supply. Prices will overshoot in a case where there is a high demand for houses, but the supply side is unable to meet this demand. Lack of enough houses leads to an imbalance in the supply and demand for housing. A high demand and low demand of houses lead to higher prices that are not good for the economy because of the inflationary effects (Yang and Yang). The government can ensure, through various initiatives that this balance between demand and supply is approximately possible. If the low supply of houses is prevailing, it can use subsidies and if otherwise it can discourage housing supply by using taxation. Reference: Betts, Phyllis G. Neighborhood Housing Markets And The Memphis Model. Washington, D.C.: Brookings Institution, Metropolitan Policy Program, 2006. Print. BRAMLEY, GLEN, CHRIS LEISHMAN, and DAVID WATKINS. "Understanding Neighbourhood Housing Markets: Regional Context, Disequilibrium, Sub-Markets And Supply". Housing Studies 23.2 (2008): 179-212. Web. Doling, John. "Financial Restructuring And Housing Markets In Finland". Housing Studies 4.4 (1989): 267-280. Web. Dovey, Kim. "Model Houses And Housing Ideology In Australia". Housing Studies 7.3 (1992): 177-188. Web. Fallis, George. Housing Economics. Print. Jaffee, Dwight M., and Kenneth T. Rosen. "Estimates Of The Effectiveness Of Stabilization Policies For The Mortgage And Housing Markets". The Journal of Finance 33.3 (1978): 933. Web. Manzi, Tony. "Fact And Fiction In Housing Research: Utilizing The Creative Imagination". Housing, Theory and Society 22.3 (2005): 113-128. Web. Nordvik, Viggo. "Selective Housing Policy In Local Housing Markets And The Supply Of Housing". Journal of Housing Economics 15.4 (2006): 279-292. Web. RP Data,. "National Australia Bank Ltd.". N.p., 2014. Web. 19 Dec. 2015. Yang, Jay, and Zhengyu Yang. "Critical Factors Affecting The Implementation Of Sustainable Housing In Australia". Journal of Housing and the Built Environment 30.2 (2014): 275-292. Web. Read More
Cite this document
  • APA
  • MLA
  • CHICAGO
(Home Value Growth, Investment in Housing Finance Assignment Example | Topics and Well Written Essays - 2250 words, n.d.)
Home Value Growth, Investment in Housing Finance Assignment Example | Topics and Well Written Essays - 2250 words. https://studentshare.org/macro-microeconomics/2085348-reading-article-and-answer-questions
(Home Value Growth, Investment in Housing Finance Assignment Example | Topics and Well Written Essays - 2250 Words)
Home Value Growth, Investment in Housing Finance Assignment Example | Topics and Well Written Essays - 2250 Words. https://studentshare.org/macro-microeconomics/2085348-reading-article-and-answer-questions.
“Home Value Growth, Investment in Housing Finance Assignment Example | Topics and Well Written Essays - 2250 Words”. https://studentshare.org/macro-microeconomics/2085348-reading-article-and-answer-questions.
  • Cited: 0 times

CHECK THESE SAMPLES OF Home Value Growth, Investment in Housing Finance

The Role of Financial Intermediaries and Financial Markets

… The Role of Financial Intermediaries and Financial Markets2009Financial intermediaries play the role of connecting real and financial sectors.... The most important financial intermediaries are banks that provide checking accounts to the public.... The Role of Financial Intermediaries and Financial Markets2009Financial intermediaries play the role of connecting real and financial sectors....
11 Pages (2750 words) Essay

Recession, House Prices, and Trade Surplus

The worrying trend in the US coupled with the turmoil in Europe raises concerns about the future course of global growth weighing down on stocks and assets, which are easily impacted by changes in growth.... The panic generated by falling Treasury yields has the potential to make consumers refuse to buy or investors to invest, and increased risks in a rise in the level of unemployment, massive corporate losses, and stagnant global growth.... Issues With the rising pressure to pay up debts and running out of monetary and fiscal policy options, the United States, the world biggest economy is on the verge of an economic and financial meltdown which will not only translates to economic stagnation but increase the prices on consumer goods and influence the value of the dollar, which is an international currency....
6 Pages (1500 words) Assignment

Necessary Changes in Irish Society That Minimizes the Re-Occurrence of Economic Crisis

The current taxation system in Irish society does not provide a favorable investment climate.... The created investment climate scares away potential investors and makes the already existing investments to underperform thus causing wages of workers to be reduced.... It is therefore important to introduce a new taxation system in Irish society that attracts and encourages investment development.... The financial crisis of 2008 slowed down the economic growth of Irish Society, thus causing it to have a high level of household debt as compared to disposable income....
6 Pages (1500 words) Case Study

Behavioral Finance: Apple and UK Banks Shares

… Behavioral finance: Apple and UK banks shares IntroductionOne of the major assumptions in the current economic and finance world is that investors are rational in their choice of investment options; they tend to seek ways to increase their wealth In Behavioral finance: Apple and UK banks shares IntroductionOne of the major assumptions in the current economic and finance world is that investors are rational in their choice of investment options; they tend to seek ways to increase their wealth In other words, they are wealth maximizers because they resort to options that seem to be profitable to them and non-complicated (Shefrin 2002)....
13 Pages (3250 words) Coursework

The Development of Chinese Mortgage Market and Its Critical Issues for Future Development

These laws were aimed at extending housing reforms and accelerate housing construction.... Before most of the Chinese urban dwellers lived under a welfare housing system where the state provided low-quality accommodation at a low cost (Malpezzi, 2010).... The mortgage market was the reason behind the booming of the Chinese residential housing sector development and sustained china's economic growth.... Moreover, the individual and household income per capita income have increased significantly since the liberalization of the housing markets....
8 Pages (2000 words) Case Study

Inflated Asset Prices in Australia

The rise in housing prices has a positive relationship with consumption where consumption accounts for about 60% of the economy's aggregate demand.... Therefore a rise in housing prices leads to a rise in consumption level and conversely a fall in housing prices leads to a fall in consumption.... The issue of housing is pointed out by traditional theory on public finance (Musgrave, 1959).... Discussions on the affordability of housing in Australia have laid blame on the effects of the failure of markets....
6 Pages (1500 words) Case Study

Why a Crisis Started in the United States in 2007 Spread So Rapidly to the Rest of the World

The anatomy of the global credit crunch in 2007 emerged from the American housing market, in sub-prime mortgage (Reischauer, 2010), the house prices had increased steadily since 2004, thus many investors were attracted in the sector, and, however, in 2006 it peaked and then had a drastic drop of more than 30%.... The decline was so enormous since 1930 and resulted in the depletion of bank capital because of unexpected disruptions as housing debt started to increase considerably in the market due to a sharp contraction in credit supply....
7 Pages (1750 words) Coursework

Analysis of the Link Between American Asset Prices and the Business Cycles

It further uses the data derived from this analysis to predict, or rather forecast the anticipated growth of the United States' economy.... It further uses the data derived from this analysis to predict, or rather forecast the anticipated growth of the United States' economy.... By looking at the variation model hypothesis, it becomes evidently clear that in as much as empirical knowledge dictates that determination of the discounted value of dividend growth expected reflects the current price, the actual link between asset market and the future and current output barely exists (Koop, 27)....
6 Pages (1500 words)
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.
Contact Us