The PPS Blog
Supply and Demand is the Issue
By Jeff Banks
To put perspective on the issue we at Property Portfolio Solutions feel we need to clear the air.
As many of you are aware, the property market in Australia has been a topic of much discussion and debate in recent years. One of the key factors affecting property prices is the concept of supply and demand, which is a basic principle of economics. When there is high demand for a product, but limited supply, the price will increase. This is exactly what we have seen in the Australian property market, where there has been an imbalance between supply and demand, leading to sky-high property prices.
The current Australian government policy has only added fuel to the fire, exacerbating the affordability dilemma of the housing market. The government’s policy was to keep interest rates low to help the country afflicted with the Covid pandemic, which meant for many, much easier access to credit, resulting in a surge of demand for property, while the supply of available housing has not kept pace. This has led to a significant increase in property prices, making it more difficult for ordinary Australians to afford a home.
Now, let’s discuss the Keynesian model and how it applies to the Australian property market. The Keynesian model is based on the concept of the supply of money in the economy and is a model followed by the Reserve Bank, and how this affects economic activity. When the supply of money in the economy increases, there is more money available for people to spend, which leads to an increase in demand for goods and services. This, in turn, can lead to an increase in the price of those goods and services, as we have seen not only in the property market but the cost of living.
Unfortunately there are many economists who believe the Keynesian model is flawed.
One of the primary criticisms of the Keynesian model is that it places too much emphasis on government intervention in the economy. The model suggests that government spending can help to stimulate economic growth during periods of recession, and that monetary policy can be used to control inflation. However, critics argue that these interventions can create unintended consequences, such as higher levels of government debt, which can lead to future economic instability. Consider this everytime there is a knee jerk reaction handout.
The problem with this is that it creates a situation where property becomes unaffordable for many Australians, particularly those on low or middle incomes. This is not only detrimental to those individuals and families who are unable to afford a home, but also to the wider community, as it can lead to social and economic inequality. When a significant proportion of the population is unable to afford a home, it can have a negative impact on the economy.
As investors, we have a responsibility to consider the wider implications of our actions and to seek solutions that benefit society as a whole, that is true.
PropertyPortfolio Solutions is not committed to providing affordable housing options for all Australians, and we believe that government policy should be focused on addressing the supply-side of the property market and it is at that level the ball has been dropped. We, under the capitalistic model of supply and demand concepts, look for the best for our clients. A narrow view, yes but one which protects the individual, rather than just stimulating demand through monetary policy which as individuals we cannot affect.
The Australian property market is facing significant challenges, with property prices at an all-time high and many Australians struggling to afford a home. The Keynesian model highlights the importance of considering the supply of money in the economy, and how this affects economic activity and social outcomes. We urge the government to address the supply-side issues in the property market, and to work towards creating a fair and affordable housing market for all Australians.
And if you wonder why governments struggle to “control” inflation and seek to do so with interest rates, the Reserve Bank’s decision to increase interest rates in an economy struggling with inflation can be a double-edged sword. On one hand, higher interest rates can help to control inflation by reducing the amount of money available in the economy, which can help to lower demand and, in turn, reduce prices. On the other hand, higher interest rates can also have negative effects on the economy, particularly if they are raised too quickly or by too much but you need to consider only around a third of Australians actually have a mortgage.
Inflation can be a significant problem for any economy, as it reduces the purchasing power of consumers, and can lead to social and economic instability. When inflation is high, the Reserve Bank may decide to increase interest rates to help curb inflation and stabilise the economy. However, this can be a difficult balancing act, as increasing interest rates can also slow economic growth, which can be detrimental to businesses and consumers, Again because the pressure is only brought to bear on those least able to afford the hikes – the low income or first home buying sector.
If the Reserve Bank decides to raise interest rates too quickly, it can have a negative impact on the economy, leading to a slowdown in economic growth and rising unemployment. This can be particularly problematic in an economy that is already struggling with inflation, as it can exacerbate the problem and create a vicious cycle of economic contraction.
It is therefore important for the Reserve Bank to carefully consider the timing and magnitude of any interest rate increase, taking into account the state of the economy, the level of inflation, and the potential impact on businesses and consumers. Additionally, it is important for the government to implement policies that can help to address the underlying causes of inflation, such as increasing productivity and reducing supply-side constraints.
The Reserve Bank’s decision to increase interest rates in an economy struggling with inflation should be made with careful consideration of the potential impact on the economy, businesses, and consumers. While higher interest rates can help to control inflation, they can also have negative effects on economic growth and social outcomes. It is important for the government to work towards addressing the underlying causes of inflation, and for the Reserve Bank to take a measured and strategic approach to interest rate decisions.
Our catchcry is “Your legacy is Our inspiration” and our approach based on what inspires you, will make your legacy seem so much easier to achieve. We are easily contacted by going to our website www.propertyportfoliosolutions.com.au where the start or even the continuation of your property portfolio is made simple.
