House prices are surging because of low supply – it's Economics 101

Stephen Koukoulas

As housing affordability becomes a live political issue there is a consensus from the government and opposition that housing supply can address the problem. They are correct. Tax rules on capital gains and negative gearing distort the housing market, as do interest rates. But there is a basic economic principle that dominates these distortions over the longer run, and that is the interplay of housing supply and demand. Until very recently, Australia’s strong population growth fuelled unrelenting growth in underlying demand for dwellings at a time when new building was not adding sufficiently to supply. Economics 101 suggests that for a given level of growth in a larger increase in supply will lower prices, regardless of tax rules. Why would a potential investor in housing, for example, buy a property when house prices and rents are flat or falling? Read my full analysis here: (VIEW LINK)


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