week7

Question 1

Prices in housing market are influenced by:

Answer 1

o	Interaction between supply and demand
o	Government (policies) intervention

Question 2

Demand for housing can be analysed from the following perspectives:

Answer 2

o Total demand (number of housing needed in a given market)
o Composition of housing in demand (mix of size, age, location, condition, owner occupancy
o Time (long term v short term)
o Housing analysis involves both numbers and preferences

Question 3

Demand: 2 categories of buyers in the housing market

Answer 3

1. ) Owner occupied – the consumer market those wanting a house to live in
2. ) Investment – investor market those wanting to make a profit from housing rental

Question 4

demand determinants

Answer 4

1. ) Population and demographics
2. ) Effective income and related credit issues
3. ) Tastes and lifestyles

Question 5

explain the demand determinant of population

Answer 5

Population and demographics:
o	Age
o	Gender
o	Occupation
o	Income level
o	Family composition
o	Other socioeconomic variables

Population and demographics:
■ No increase in population è Increase in divorce rate è need for additional housing
■ Divorced person require another living space!
– Divorced person remarries è additional demand TEMPORARY
– Divorced person remain unmarried è additional demand PERMANENT
■ Example: California
– Divorce rate is the MAJOR factor contributing to turnover rate
– Turnover rate: %of housing units which change occupants each year
■ Divorce Rate è small overall impact on total housing demand but still is another aspect influencing housing demand

Question 6

define effective income

Answer 6

When need for housing is backed by adequate income support to pay the costs of housing

Question 7

define disposable income

Answer 7

– Gross income less income taxes

Question 8

define discretionary income

Answer 8

Gross income less income tax less necessity expenses

Question 9

define income changes

Answer 9

Affect type of housing in demand (e.g. multigenerational household, move away from rental

Question 10

Demand determinant – taste influences

Answer 10

– Better standard of living
– Desire/Expectations
– Opportunity Cost -¬‐ other priorities

Question 11

explain supply determinants

Answer 11

Housing differs from many other economic commodities
o Existing stock capture large % of demand
o Therefore, change in supply is fixed in the short run

Future housing Supply will consist of:
o Units, apartments, houses currently available
o Less those lost as a result of fires, demolition and conversions to other uses
o Increased by buildings converted to housing
o Add new constructions

Question 12

what is the role of the government in the housing market?

Answer 12

o Prevent market failure – to address the unsatisfactory aspect of the market mechanism of the supply and demand

o Imperfect market requires government intervention:
Buyer’s inadequate knowledge
Prevent discrimination by sellers
Provide housing for low income

Question 13

How can the gov’t intervene in the property market

Answer 13

o Housing regulations (control and restrict supply)
o Financial support (increasing demand)
o Other actions to increase supply (e.g. brownfield and conversion of use)

Regulating Housing markets:
o Policies to halt some actions of the market (e.g. zoning and planning)
o Subdivision law (local law typically define street widths, utility standard, etc.)
o Building codes and housing standard (specify minimum housing construction standard such as electrical, plumbing foundation, strucutal design, renovation details etc.)
o Affordable housing – state and federal government
o Rent control – Federal government – Centerlink and National rental affordability scheme

Financial support (increasing demand)
Demand subsidy:
First home owner benefit:
o	First home owner grant
o	First home bonus
o	First home owner stamp duty exemptions and concessions

Other government actions to increase supply:
Government subsidies:
o	Capita subsidies
o	Discounted land
o	Density bonus
o	Land tax exemption
o	Stamp duty exemption
o	Government grants

Taxation policies

Question 14

define housing affordability

Answer 14

The relationship between expenditure on housing prices, mortgage payments or rents and household incomes

o The concept of housing affordability is different to the concept of ‘affordable housing’, which refers to low-income or social housing

o* Housing affordability is a measure by comparing the house prices to incomes

o The Demographia International Housing Affordability Survey measures middle-income housing affordability, using median measures of existing house sales prices and household incomes
o Provides perhaps the largest collection of housing affordability data by international market (293 markets in 9 countries

Question 15

measuring housing affordability

Answer 15

The Demographic International Housing Affordability Survey uses the “Median Multiple” (median house price divided by gross annual median household income) to assess housing affordability

Question 16

Housing Affordability index: National Association of Realtors and California Association of Realtors uses 3 Critera:

Answer 16

o Median price for the area
o Prevailing interest rate for home loan (80%lvr 20% deposit)
o Household income for area

Question 17

define housing stress

Answer 17

= Housing stress occurs when cost of housing is relatively high to household income (>30%)(e.g. Mortgage repayment, Rate, Building Insurance, Home Content Insurance…etc

o If more than 30% spent on housing cost è Other living expenses share may have to reduce (e.g. Food, Education, Transport, Entertainment…etc)

o “Poor housing and housing stress, together with other life stresses, reduces psychological wellbeing and exacerbates mental illness,” (CEO of Mental Health Australia Frank Quinlan)

o More people tend to rent instead of owning a house and pay mortgage (Mortgage repayment generally > rental payment)

Question 18

reasons for unaffrodability

Answer 18

o	Higher household incomes
o	Demographics
o	Rental markets
o	Lower interest rates
o	Credit Availability
o	Speculative demand
o	Taxation influences

Question 19

how to higher incomes lead to unaffordability

Answer 19

o Australian incomes have increased across
o all income quantiles over the last decade
o Lead to a larger demand for housing (Parliament of Australia,2016)
o In the upper end, there has been an increased demand for “holiday homes”, particularly in coastal regions
o Increased demand puts upward pressure on house prices
o Rise in productivity = derived from higher prices of resource boom = average household income and wealth increase

Question 20

demographics impact on unaffrodability

Answer 20

o Average housing household size has decreased for a number of reasons such as later marriage fewer children and increased incidence of separation and divorce”.
o Retirees refusing go downsize
o Further, Australia has a steady increase in population in the recent past

Increases in population
• Mainly due to steady immigration over the past decade
• Lead to stronger housing demand & stronger house prices
• Lead to a growth in the population particularly where housing is already short (e.g. Sydney & Melbourne)
Immigrants tend to be attracted to areas where
• More employment opportunities
• Cultural facilities catering for their ethnic backgrounds

Question 21

Unaffordability – increased rents impact

Answer 21

o Rent has steadily increased in the past few years.
o Lead to the “desire” of families to buy their own home rather than renting
o Harder for families to save a deposit

Question 22

unaffordability impact low interest rates

Answer 22

– With lower interest rate, the borrower can get MORE FUNDS to purchase property; cheaper to borrow
– è Demand Increase & Short Term Supply is fixed
– è Push Up Property Price!!!

Question 23

unaffordability credit affordability

Answer 23

o Since the deregulation of Australian financial markets
o A wide range of loan products available to suit various borrowers.
o A larger availability of credit has lead to more borrowers being more able to purchase larger properties, which leads to a larger demand for housing

Question 24

ways to resolve housing affordability

Answer 24

o Supply of innovative financing models
o More capital injection from institutional investors into affordable end of residential market
o Promising certain tax incentives for institutional investors
o Reduce the funding gap between creating and maintaining a rental housing of low income people (eg. use of the affordable housing targets, planning mechanism, tax setting)
o Develop a common regulatory framework across all jurisdictions and provide certainty for the community housing provider
o Ensure the community housing sector has the necessary financial, asset and risk management expertise

Question 25

What does affordability mean and how many different measures are there? Are all reports talking about the same ‘affordability’?

Answer 25

Property considered affordable if “the costs for renting or mortgage repayments are less than 30% of the household income”.

The different measures to evaluate affordability:
Median multiple: The median house price divided by the medium household income for a particular market;
Housing affordability index
Stress Assessment: stress associated with proportion of income been allocated to housing.

Question 26

If the average property price in Sydney is $1,123,991 and the median multiplier is 12.2, what is the median income of a resident in Sydney

Answer 26

$1,123,991/12.2= $92,130.41

Question 27

What is the key factor in Australia’s affordability crisis? What variables could change which would allow for the Melbourne property market to become more affordable? (List 4 and discuss)

Answer 27

demand > supply

All these factors could potentially change to reduce cost of housing or ease access into the property market….key factor is to increase supply and density…..consider 2017 budget proposals….
tax on empty properties
Salary sacrifice savings
Some reduction in claims for tax deductible items for investment properties
Changes in stamp duty etc

Question 28

What variables could change which would allow for the Melbourne property market to become more affordable?

Answer 28

There are a number of factors which contribute to the overall unaffordable nature of the property market, these factors directly and indirectly contribute to the broadening gap between housing values and household income in Australia. Some of these factors include:
Incentives to purchase property (FHBG/Stamp duty concessions etc.)
The effects of negative gearing
Supply and demand within the market
Drivers of Demand – key factors – Tastes, Income, population growth…
Construction/labour costs
Building material costs
International investors and local investors

Question 29

Q: What is the key factor in Australia’s affordability crisis? What variables could change which would allow for the Melbourne property market to become more affordable? (List 4 and discuss)
A:

Answer 29

Increase supply of properties by unlocking new parcels of land (possibility Greenfield)
Increasing densities within the cities
Develop and increase density in established areas
Increase incentives such as FHOG/stamp duty concessions etc. (Example:1st July 2017 stamp duty will be $0 if purchase price <= $600,000 in Victoria)
Limit or cap international property investments within Australia
Eliminate or alter negative gearing legislation  Limit wealthy investor demand
Increase policy to enable lower socio-economic group’s easier entry points into the market.

Question 30

pros of living regionally

Answer 30

Large property space  Use as farm purpose
Low Density  Good for retirement class

Cheaper purchase price
Less initial outlay cost
Less competition

Question 31

pros of living in a major city

Answer 31

Closer to frequent used facilities
Great transportation system

Pros
Great resale value
Better growth rate

Question 32

cons of living regionally

Answer 32

Transportation will be a problem
Very few faculties nearby (school, hospital…e.t.c

Less Resale value/opportunities
Growth Rate very limited

Question 33

cons of living in major cities

Answer 33

Cons:
Very limited property space  Limited purpose
High Density  May be stressful to some occupant

Higher purchase price
More initial outlay cost
More competition

Question 34

gov’t interventions to help affordability

Answer 34

Using superannuation to support the deposit (First home super saver scheme) to a max of $30K
Provide extra incentive/cheaper finance to support low income earner (National Housing Finance and Investment Corporation)
Incentives for downsizers - $300k per individual into super (tax free when drawing it down >60 years old)
Land (Govt owned land) released for development - Melbourne’s Maribyrnong
Transport infrastructure increased (improves access for further out developments
Increased funding for community housing (low cost housing….huge wait lists!)
Negative gearing reform – no longer claim travel, some items no longer can deduct
Capital Gain Tax reform
Foreign investor limitation/extra restriction $5000 levy on foreign-owned properties empty for more than 6/12 each year