In Melbourne, there has been an increase in the property prices. There was a pronounced increase in the sales as well as the prices as shown in the graph above. The increase in the demand was due to the increase in credit availability from the banks. This is due to the availability of credit stemming from financial deregulations of the markets. The increase rates from 2008 have led to an increase in the borrowing capacity of the people owing to the lower repayment.
There is increase in demand due to the governmental release of newer lands. Government has restricted the use of many land development projects citing higher density of land usage. There is urban densification that has been met with more governmental regulations. This has increased the demand (Crowe et al., 2012). In the case of perfect competition price is dependent on the exiting competition and the profit maximization is observed at the output level. In the case of monopoly P > MR = MC, this is found to be implemented at the maximizing output level. Governmental regulations regarding land use has caused the paradigm to shift towards monopoly markets. There is limited supply and greater demand that has been observed.
Added to this paradigm, the debt growth averaged 15%, during which the national economic growth was less than 3%. Inflation was found to be about 36% and led to the property prices to increase by more than 280% for the real estate markets of Melbourne. This inflated housing price has led to diversion of capital from the rest of the economy (Crowe et al., 2013). The bank increases the amount of mortgage lending and decreases commercial lending, leading to reduced loan amount, higher interest rates and reduced investments.
In Australia, it has been observed that there are high stamp duties, income tax relief from negative gearing. This is the practice where the investor borrowing money to acquire income producing property for the future. In this process the gross income generated is less. There is depreciation and interest charged on the loan. It is a form of financial leverage that the investors use when they buy property. The tax systems favor the home owners and investors. They are given capital gain tax discounts. There is a surge in the foreign investments for the land and these have increased the demand for the products. The main tax incentive that included tax deduction for the investment properties were negatively geared. There was the 50% discount provided to the capital gains.
The increase in credit line has caused more people to develop interest in developing properties.
One of the major reason as to why the interest rates are important is that they are instrumental in creation of housing bubble. They make unaffordable properties affordable. The home buyers buy houses that they cannot afford. The Australian home prices must be proportional to the household income, rent, construction costs and demand.
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