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Impact of The Coronavirus Pandemic on The Australian Housing Market

Executive Summary of Impact of The Coronavirus Pandemic

The report highlights the impact of the coronavirus pandemic on the Australian housing market. It has been observed that the outbreak of the deadly virus has led to fall in the prices of home.

The fall in the prices of home has affected the sellers of the housing market in Australia. The housing market has turned into a buyers’ market from a sellers’ market.

However, the demand has not risen due to fall in the prices of home due to the low price elasticity for demand of housing. This is also due to the fall in consumer spending bt the buyers of houses due to the outbreak of deadly virus. The fall in the consumer spending by the buyers of housing is due to the sudden fall in the economy and shut down of businesses among different industries.

It has been observed that the different sellers of housing are affected differently. The reason behind this is that the value of debts on the home is different for different sellers. Thus the value of home equity is different for different sellers of housing.

The report also highlights the impact of government subsidies or grants on the housing market. If subsidies are provided to the buyers of housing market, there will be a rise in the demand of housing. However, on the other hand, if grants are given to the sellers of housing, the value of home equity will rise for them as the debts can be reduced. They will not be much affected by the fall in the prices of home.

Table of Contents

S. No.

Topic

Page No.

1.

Introduction

4

2.

Impact on the Housing Market

5

3.

Benefit Party from the Fall in Home Prices

6

4.

Is the Change Widespread in Australia?

8

5.

Welfare impact

9

6.

Subsidies or Grants Effect on the Housing Market

11

Introduction to Impact of The Coronavirus Pandemic

The outbreak of deadly virus started from the Wuhan market in China. The spread of this virus was so fast across the other countries and it was declared as a pandemic. The COVID-19 pandemic affected a large number of countries worldwide.

The impact of the COVID-19 pandemic in the Australian market is huge. The spread of the deadly virus on the Australian economy is adverse. The quarantine restrictions led to the shutdown of businesses across various industries in Australia. There are numerous jobs which are being terminated and stood down. Employees are forced to accept low wages and the work hours are reduced( Ross, L. P. (2020). It is not surprising that these conditions have led to a significant increase in the consumer unemployment expectations and it is continuously increasing. This has further led to a decline in consumer spending, reduction in wage expectations and fall in the home price growth. Almost all the industries in Australia is negatively affected by the coronavirus pandemic. This is either due to the reduced working hours, temporary absence of workers or wage cuts.

Impact on the Housing Market

Due to increase in the unemployment rate in Australia, the other micro and macro economic variables were also affected. The rise in unemployment rate has led to fall in the consumer spending and home prices growth. Along with the considerable loss of employment, the standard of living of the people of Australia has been severely affected. The house prices fell by 30 % approximately in many major states of Australia (Maalsen, S., Rogers). It is expected that this fall in the prices of houses is not only for months but it could be for years. This is because the world is facing one of the biggest economic contractions.

It is important to consider the impact of the coronavirus pandemic on the housing market because it is the biggest source of wealth for the households of the people of Australia. According to the Australian Stock Exchange (ASX) and Australian Bureau of Statistics (ABS), the final worth of the residential property in Australia is greater than the triple of the securities that are publicly listed. It is seen that in order to save jobs and incomes of people, banks have given a stop to repayments of mortgage along with the government measures to do the same. The landlords have also deferred rents and thus, there is a moratorium on evictions. As the restrictions are lifting, the population have begun to return to auctions.

In living memory, it is seen that the outbreak of coronavirus pandemic has led to biggest economic crises all over the world. Looking at the financial sector, financial markets have quickly re- priced the securities such as stocks and bonds. However, the house prices generally uses long time to show the effect of the pandemic on the economy. There are numerous reasons behind this. The major difference between houses and stocks are that it is hard to buy or sell a house but it is very easy to buy or sell stocks and bonds. The other major difference between houses and stocks is that houses vary to a large extend from one to the other. Also, every individual value houses more than any stocks or bonds. Therefore, with the falling stock prices there can be prediction of the prices of houses. Thus, the prediction for prices if house is easy to make.

Benefit Party from the Fall in Home Prices

Who will be benefitted more? The question that arises is that who all will be affected by the fall in the prices of home. This depends on the value of home equity. Home equity can be defined as the value of a home minus the amount of debt borrowed against it. In other words, home equity is the cash received by the buyer if the seller sells his home after the payment if all the outstanding debts on the home.

It is observed that in Australia most of the households have minimal amount of borrowings. This is good for the sellers of home because they are in healthy position even if there is reduction in the home prices (Eleftheriou, K., & Patsoulis). Although, the households with large amount of borrowing will be affected more by the fall in the prices.

Therefore, the sellers of the home will be affected by the fall in the house prices as the value of home will be reduced for them and thus the value of home equity will fall. However, the impact of the fall in the home prices are different for different sellers. The seller who have low level of borrowings will be affected less as the fall in the home equity will be less. But for the households with large amount of borrowings will be affected adversely. This is because their home equity will be less.

The flip in the housing market from sellers to buyers has affected the Australian economy. However, there is a fall in the demand of home after the pandemic. This is due to the fall in the consumer spending, income and rising unemployment. People could anticipate the economic depression due to the spread of the deadly disease. They are more cautious and are not spending much. There is less cash left with the households to buy homes. Thus, the sales in the housing market will come down, thereby leading to a fall in the prices.

The people are facing a lot of problems during this downturn as the factories are shut down. Employees are laid off. These employees are unable to pay bills and have no source of income. Also, the government couldn’t support them for a long as they have limited payouts to cover everything. Also, the impact of the coronavirus pandemic is not limited to only small businesses but it is affecting all the big businesses, families and individuals.

The overall health of the market is very necessary factor determining the sale in the housing market. With the health of the Australian economy deteriorating, there is a fall in the buying power of consumers of housing market. There is lack of funds available to the people to purchase homes. They will not be able to pay their payments of mortgage. The tightening of credit had a huge negative impact on the market of housing. As the buyers are less able to pay their mortgages due to increased tightening in the credit, the demand of the houses started falling.

Given the current economic condition, the buying power of the buyers of housing market has reduced. This can be seen from the figure above. The demand curve D2 shows the demand curve of housing market before the pandemic. The supply curve S1 shows the supply curve of housing market. The equilibrium in the housing market before the coronavirus pandemic is at E2. At E2, the equilibrium price in the housing market is P2 and the sales quantity of home is Q2. After the pandemic and shrinkage in the incomes and fall in the employment, the demand in the housing market falls. This is also due to fall in the consumer confidence in the market. The demand curve of housing market fells from D2 and D1. This fall led to shift in the equilibrium in the housing market from E2 to E1. At the old prices of P2, there is an excess supply, that is, the number of sellers selling the home is more than the number of buyers seeking for homes. This pull the home values to P1. There is a fall in the prices of home from P2 to P1. The sales volume also fell from Q2 to Q1.

Is the Change Widespread in Australia?

After a prediction is made on the prices of house in the future, it is observed that different areas are facing different amount if fall in the prices of houses. Also, the impact of fall is different in different areas due to the difference in the value of home equity.

It is predicted that in Melbourne, Brisbane and Sydney the fall in the home equity will be around 10 per cent or more. However, the fall in the home equity in Adelaide is very less. It is observed that Perth will be adversely hit. In Perth, around one quarter of households will face fall in the home equity of about 20 percent or more. The reason behind this difference on the fall in the equity prices if home is that Perth is highly affected by the change in the stock market prices. Also, in Perth, the total amount of debts of households are more than the value of the home.

Welfare Impact

The above analysis shows that there will be loss in the welfare of sellers of housing market. The large fraction of households of Australia are affected significantly by the fall in the prices of housing. The sellers of housing market will suffer large wealth destruction by these changes in the home prices.

The impact on the wealth of the sellers will significantly affect the Gross Domestic Product (GDP) of Australia. This is because the consumption and economic growth is affected with the changes in wealth.

However, the buyers are faced with low prices of home. Therefore, they have a benefit if they purchase the home at low prices. This can increase the welfare of buyers of the housing market. However, the demand of the housing market is inelastic. The inelastic demand of housing market signifies that even if the prices of home falls, the change in the demand of home will be less. This is also due to the negative impact of the coronavirus pandemic on the consumer confidence and consumer spending.

Looking at the Great Recession which was seen ten years ago, it was observed that with the huge fluctuations in the market, initially the housing prices fell but eventually the housing market recovered and the prices rose.

The Above figure shows the after effects of fall in the home values. It shows that the fall in the home prices will make less profitable for the sellers to sell the homes. Therefore, the supply will fall from S1 to S2. This fall will lead to a pressure in the prices. The prices will increase from P1 to P2 and the sales will fall from Q1 to Q2.

Subsidies or Grants Effect on the Housing Market

Looking at the downfall in the economy, the government of Australia and the Reserve Bank of Australia are taking major steps to avoid the country from getting into depression. To boost the Australian economy, many fiscal and monetary stimulus are taken in response to the coronavirus pandemic.

Also, the support from the government could not have a significant effect on the demand of housing market. If the condition does not improve, there is chance that the home market freezes.

The above figure shows the impact of government support to the buyers or sellers in the housing market. Suppose, the buyers are provided with the subsidies, this will lead to increase in the income and buying power of buyers in the housing market. The demand curve will shift rightwards from D1 to D2. This shift is due to boost in the consumer confidence of Australian people by the government. There is a pressure in the prices as at the old price, the demand for housing is more than the supply of homes by the sellers in the housing market. This shortage led to increase in the prices from P1 to P2. The sales of homes also rise from Q1 to Q2. Thus, with the help of government support, there is a chance that the demand in the housing market can be boosted.

References for Impact of The Coronavirus Pandemic

Peters, R. (2020). Reflections on COVID‐19 in Sydney, Australia. City & Society (Washington, DC)32(1).

Romano, F. (2020). An Estimate of the Economic Impact of COVID-19 on Australia. Available at SSRN 3581382.

Ozili, P. K., & Arun, T. (2020). Spillover of COVID-19: impact on the Global Economy. Available at SSRN 3562570.

Guide, G. P. (2020). Investment Analysis of Slovenian Real Estate Market.

Wittwer, G. (2020). The 2019-20 Australian Economic Crisis Induced by Bushfires and COVID-19 from the Perspective of Grape and Wine Sectors.

Rogers, D., & Power, E. (2020). Housing policy and the COVID-19 pandemic: the importance of housing research during this health emergency.

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