Economics for Accountants

Question: Discuss about theEconomics for Accountants. Answer: Bubble in Housing Market Bubble in housing market generally referred to the hike in housing price. During past thirty years, housing prices in Australia has been rising by 7.25% per annum on average. As stated by David (2015), property bubble is a kind of economic bubble that indicates steady rise in market price of property. Housing prices increase keeping parity with increase in income of household and rent. Income raises aggregate demand for housing in domestic economy and attracts investment from international market. As supply of housing is less elastic compared to demand, housing prices increase rapidly in the economy. Among the other cities, housing prices has developed rapidly in Sydney. Low interest rate, high population growth, favourable tax system for the investors is significant attributes for rise in housing price in Australia. Figure 1: Australian Housing bubble stage (Source: australianpropertyforum.com, 2015) Ponzi Scheme As discussed by Worthington (2012), ponzi scheme is a type of fraud in investment, when the payment of the first investor is done using the money received from another investors. No real return is generated from this investment. A fraud person or agent may place an advertisement for a housing investment, which does not exist and may earn extraordinary return within a very short period. The fraudster vanishes with all the money leaving the investor with no return including the principle amount. The needless increase in demand builds up a distorted asset market with rising mortgage in Australian banks. This housing market may collapse if the growth model of housing price breaks. Figure 2: Demand and supply of housing (Source: created by author) As approval for new building is growing, the supply increases in the market of housing, keeping demand unchanged. Therefore, supply curve shifts towards right securing new equilibrium at point E2. As supply of housing has increased in the market, quantity of housing increases and price of housing property starts to fall in the market along the demand curve. New equilibrium is reached, where the new supply curve the demand curve. Market equilibrium is achieved at a lower price and a greater quantity. When financial markets are deregulated, new lending institutions tend to emerge and hence, competition increases in the market. In order to attract more customers, lenders try to lend at a lower interest. Borrowers search the lender with lowest cost of capital in both foreign and domestic financial market (Irvine, 2015). It can be stated from the viewpoint of the moneylenders that they undertake greater risk of writing loans in order to increase revenue. However, banks and other financial institutions face credit risk while lending money. Investment in real estate market such as Australia is more risky. Therefore, although borrowers are better off by increasing welfare, economic welfare are not increased through this method, as banks may face insolvency and credit risk if loans remain unpaid (Worthington, 2012). This process may result in loss as depositors will not get their payments and bank will be burdened with increasing nonperforming assets. Oligopoly is a market, where only few firms operate. Cosy oligopoly refers joint venture of different firms. Those firms may compete with each other or may form cartel to keep market power and control over price. Products in this market are differentiated. Firms often engage in price war. As stated by Eyers (2016), acquisition in the banking sector of Australia reduces the competition in the financial market. As competition decreases, number of available options to the customers also decreases. The parent bank gains the power of keeping price at high level. Major Australian banks that holds more than 85% market share over the years are National Australian bank, Commonwealth Bank, Westpac and Australia New Zealand Banking group. Concentration of market power increases the industry profits. References australianpropertyforum.com (2015). Australian property forum. Retrieved 26 January 2017, from https://australianpropertyforum.com/topic/10305033/1/ David, L. (2015) Banks have treated our housing market like a Ponzi scheme, and it's about to bust. Retrieved 26 January 2017, from https://www.theguardian.com/commentisfree/2015/aug/20/banks-have-treated-our-housing-market-like-a-ponzi-scheme-and-its-about-to-bustid Eyers, J., (2016). ACCC warns 'cosy' banks it is concerned about competition. Retrieved 26 January 2017, from https://www.smh.com.au/business/banking-and-finance/accc-warns-cosy-banks-it-is-concerned-about-competition-20160322-gnojod.html Irvine, J., (2015). Simple supply and demand will decide what happens next to Sydney house prices. Retrieved 26 January 2017, from https://www.smh.com.au/nsw/simple-supply-and-demand-will-decide-what-happens-next-to-sydney-house-prices-20151126-gl8z7o.html Worthington, A. C. (2012). The quarter century record on housing affordability, affordability drivers, and government policy responses in Australia.International Journal of Housing Markets and Analysis,5(3), 235-252. [Retrieved from https://www.researchgate.net/profile/Andrew_Worthington4/publication/254417876_The_quarter_century_record_on_housing_affordability_affordability_drivers_and_government_policy_responses_in_Australia/links/5462acee0cf2cb7e9da653b8/The-quarter-century-record-on-housing-affordability-affordability-drivers-and-government-policy-responses-in-Australia.pdf]