ECOS3021 Business Cycles and Asset Markets
University of Sydney, Semester 2 2023
Assignment
Due date: 5pm Friday 10th November 2023
Assessment weight: This assignment is mandatory, and comprises 25% of the final grade for the
class.
Aim: The aim of the assignment is to help you develop your (collaborative) research, analytical
and reporting skills. You will need to read policy reports, news articles, find and download data,
and critically analyse and interpret these materials. In addition, you are expected to apply the
concepts and tools studied in class to the assignment problems.
Groups and group membership: You must work in groups of two (2) or three (3). You cannot
submit an individual assignment. To form a group, see “how do I join a group as a student” on
Canvas: https://community.canvaslms.com/docs/DOC-10516-421264913. Each member of the
group owns the final product: no special blame or praise will be accorded to a particular member.
At the end of the assignment, attach a brief statement signed by all members describing how each
member has contributed to the assignment.
Structure of the assignment:
• Title, author(s), and executive summary (abstract), with no more than 150 words on a separate
front page
• Primary analysis including tables, figures, and discussion (approximately 1000 words)
• Conclusion summarising your main arguments and results (approximately 300 words)
• A brief description of your data sources and definitions of the variables used, on a separate
page
• Bibliography that clearly cites all of your references (e.g. academic articles, reports, news
articles)
– Your bibliography must include webpage links to the news articles and policy
reports cited in your assignment
The report must not exceed 1500 words (excluding the executive summary, data description, and
bibliography).
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Submission: A representative from your group should upload the final electronic copy via Turnitin
on Canvas (only one report for the group is required) by 5pm on Friday November 4th. The cover
page should include the name and student number of each member of the group. Note that when
submitting the assignment individually, you may receive a warning that it is a group assignment.
However, you can safely ignore the warning. Please note: your assignment will not be graded if
submitted in any other way (i.e. no email or paper submissions).
Penalty policy: Standard Policy. For every day late in submission, 5% will be deducted from the
final grade.
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ASSIGNMENT TOPIC:
The Housing Situation in Australia
1 Background
The COVID-19 pandemic has had a significant impact on economies and housing markets around
the world. After an initial early decline, there recently has been a fast increase in house prices and
rents in Australia, much beyond the increase in the Consumer Price Index. These trends are shown
in Figure 1 below:
Figure 1: House Prices and Overall Price Index - Australia
Notes: Both indeces are normalized to one hundred at Q3 2011. Source: Australia Bureau of Statis-
tics, and Marcel’s own calculations. Mean Price of Dwelling Unit obtained from the June Quarter Release
of the “Total Value of Dwellings ”. Url: https://www.abs.gov.au/statistics/economy/price-indexes-and-
inflation/total-value-dwellings/latest-releasemean-dwelling-price. Consumer Price Index obtained from the
“Consumer Price Index” Release, Q2 2023. Url: https://www.abs.gov.au/statistics/economy/price-indexes-
and-inflation/consumer-price-index-australia/latest-release.
This increase has triggered major discussions about housing affordability, as well as wealth
inequality, in Australia. Housing is widely understood as being the one of the most important
source of wealth for households, as well as an important part of individuals’ financial security,
especially later in life. According to the 2020 Income and Wealth Report from the Australian
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Government, owner-occupied dwelling accounted for roughly half of Australians’ net worth in 2017-
2018. For comparison, this number was approximately 25% in the United States in the same
period. But, of course, housing is a basic necessity for everyone, and the recent increase in rental
prices and in interest rates are impacting many individuals, particularly those at the bottom of the
income distribution. In all, the housing affordability crisis, with its profound economic and social
implications, remains a ubiquitous and pressing topic at the forefront of political discussions.
In this assignment, your task is to provide an assessment of the housing situation in
Australia. This task will require an understanding of what the determinants of house prices (and
rents) are, what has their evolution been in the past and what we can expect in the future, both
over the short and over the long run.
2 Assignment
Your task is to assess the outlook regarding the evolution of housing prices in Australia. To support
your analysis, read policy notes from different sources (Australian Bureau of Statistics, Reserve
Bank of Australia), academic and news articles, and listen to podcasts. In addition, you can use
concepts and theoretical tools learned in class to support your arguments. Suggested references and
data sources are provided at the end of this document, but they do not consist of an exhaustive
list. Whenever possible, support your claims and arguments with graphs and data.
The primary analysis of your assignment must be divided in two segments, of approximately
equal sizes. Your assignment must contain segment number one listed below. In addition, you must
select between segments 2 and 3.
1 The current state of the housing market. In this section, you will briefly discuss the
current evolution of house prices in Australia. You should use this section to introduce the
main drivers of house prices and the intuition as for what their impact is. In addition, you
should outline their evolution over the past 10-20 years. Your analysis should evaluate at
least two drivers. A non-exhaustive list of suggestions is below:
– Interest rates.
– Change in consumer preferences after Covid (e.g. working from home)
– Wealth inequality
– Tax Policy, in particular the absence of a wealth tax (in favour of stamp duty), negative
gearing, and the absence of an inheritance tax.
– Housing Regulation
– Foreign Investors
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An example of good analysis for the first segment would be: (i) include a graph of house
prices and rents in Australia and discuss it (bonus: compare different cities), (ii) propose
at least two determinants of the observed trends; explain the mechanisms through which
they operate; support your discussion with references, (iii) if these are indicators that can be
quantified, consider the evolution of these trends over time (up until 2023), and show that the
evidence is indeed consistent with the proposed mechanisms; if these are not indicators (e.g.
tax policy, regulation), discuss, supporting your arguments with references, their role in the
recent increase of house prices.
2 The short-run outlook. This section focuses on understanding the near-future (1-2 years)
evolution of real estate prices and rents in Australia. Over the short run, the supply of
housing is inelastic, and thus demand forces dominate. In particular, the recent increase in
interest rates implemented by the Reserve Bank of Australia to ease inflationary pressures
(by encouraging households to save more and reduce their demand for goods and services)
is expected to cool off the housing market. In this part, you should focus on the role of
interest rates. In particular, you should analyse the following:
a How does a higher interest affect the ability of households to pay their mortgages in
Australia?
- bonus: how is that different in other countries?
b Is there evidence that the rise in interest rates is making more difficult for consumers to
pay their mortgages?
- A very good source for this analysis is the RBA Financial Stability Review.
c In all, is the housing market expected to continue to cool off in the following months?
An example of good analysis for the second segment would be: (i) briefly discuss the role of
interest rates in determining house prices, alluding to the concepts and theories seen in class (ii)
search for evidence of the impact of interest rates on consumers and ultimately on house prices;
provide at least two pieces of evidence, supported by references, that the increase in the
cash rate is having/not having an effect on prices; a list of possible indicators/evidence include
(i) house prices themselves, (ii) measures of consumers’ financial distress or difficulties in
paying their mortgages, the evolution of clearance rates, measures of housing market tightness;
and (iii) analyses of whether house prices are expected to rebound or not in the near future;
these can come from reports from the Reserve Bank of Australia or the private sector.
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3 This segment contains an analysis of the possible evolution of the housing market in Australia
on the long run (say, 5-10 years). Naturally, it is very difficult to predict the situation of
the housing market towards the future. Because of this, it is important to contrast different
references and consider the uncertainty in the predictions. In addition, over the long run
housing policy plays a crucial role and must be discussed.
In this section, aim to answer the following questions:
a Is there a consensus on whether house prices will keep growing or not?
b What are the reasons for your answer above? Provide at least two pieces of evidence
that support your answer.
c Discuss the role of policy choices. Is the recently proposed policy by the Prime Minister
expected to help?
A non-exhaustive list of topics of discussion (from which you should pick at least two to discuss
item b above) is below:
– Regulation and the role of local councils and NIMBY s. Provide examples.
– Discuss the new policy proposed by the Prime Minister in August, supporting the analysis
with other articles.
– A possible reversion in working from home trends.
– Future demographic trends in Australia.
– The role of migration policy
– Tax Policy
– Foreign Investors
An example of good analysis for the third segment would (i) discuss different articles and/or
studies on whether house prices will continue to rise or rebound in the future, contrasting at
least two different views; and (ii) discuss the role of two different policies in determining
house prices, and what kind of policy reforms may be able to remedy the situation.
2.1 Data
You can use a selection of macroeconomic, housing indicators, and even microeconomic data to
support your analysis. Our main data source in the lectures, the Federal Reserve Economic
Database (FRED), will feature limited Australian data. Instead, some possible sources are:
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• The Australian Bureau of Statistics. The ABS provides information on a multitude of eco-
nomic indicators, ranging from house prices and rents to the more usual macroeconomic
indicators such as GDP.
• The RBA chart pack, featuring graphs on the Australian economy and financial markets.
• https://www.housingdata.gov.au/ - features a multitude of housing indicators in Australia.
• Information contained in summary reports of the Survey of Income and Housing.
• Information contained in summary tables of the Australian Household Expenditure Survey.
• FRED is useful to compare the situation in Australia with other countries, which is something
you might want to do to support your arguments.
• Australian Bureau of Statistics - Buildings Approved
• The Money Podcast
• Philip Lowe’s message before leaving the Reserve Bank of Australia
• Research Page - James Graham, Senior Lecturer at USyd
• Whelan, S., Atalay, K. , Barrett, G. , Cigdem-Bayram, M. and Edwards, R. (2023) Transitions
into home ownership: a quantitative assessment, AHURI Final Report No. 404, Australian
Housing and Urban Research Institute Limited, Melbourne, https://www.ahuri.edu.au/research/finalreports/404,
doi: 10.18408/ahuri7327101. (Also check “Related Reports”)
• Australian Financial Review - NIMBYism in Sydney
• Report - Twenty Five Years of Housing Trends, by Corelogic (from 2018)
• ABC - Housing Stress and Interest Rates
• On Average, Australians live in the largest houses in the world!
• ATO - Negative Gearing
General Information
Citations: Where appropriate and relevant, the assignment should be carefully referenced using
in-text citations and include a bibliography. You can use any referencing system, but make sure
you apply it consistently. A good way to do this is to use bibliographic software such as Zotero or
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EndNote. These applications will not only ensure the consistency of your references, they have the
added advantage that they will compile and format your bibliography automatically. Note that a
URL on its own is not a reference!
You must also cite the data you download from various sources, as well as any figures you include
in your report that you took from other sources. In this case, you should provide the url and the
date of access.
Grading Criteria:
1. Research: How carefully have you selected your primary data sources ? How carefully have
you read, considered, and analyzed the discussions contained in the references you considered?
2. Analysis: Does your analysis thoroughly examine the issue or question at hand? Does it
provide sufficient evidence to support your claims? Did you draw on models and concepts
from class to aid in your analysis? How well did you combine your reading of articles, use of
data, and application of economic models from class?
3. Presentation: Is your report carefully and professionally presented? Are your graphs clear,
labelled, and easy to understand? Does your report contain appropriate references and cita-
tions?
Plagiarism: Read, understand, and adhere to University of Sydney policies on plagiarism and dis-
honesty: https://www.sydney.edu.au/students/academic-dishonesty.html. It is important
to note that plagiarism is a serious academic offence, and no excuses for failure to understand in-
stances of plagiarism will be accepted. Specifically, it is unacceptable to copy figures and text from
other sources without citation or attribution (this includes copying from other students’ assign-
ments). Assignments that contain any such copying will receive a mark of zero. Please also beware
of plagiarism in parts of the written report written by the other members of your group. The entire
group will suffer if there is any occurrence of plagiarism.