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House prices: Karratha and Sydney - why the divergence
The thousands of students heading off to university this month to start their economics degrees can do so knowing that the basic laws of the discipline still hold. “Yay” – they might say as they sit down to their first Economics 1001 lecture.
Supply and demand is king.
Shortages, gluts, price booms and crashes reflect the supply and demand dynamics. These are the most basic concepts in the study of economics and they apply to the real world. These basic economic laws apply to the Australian housing market which is going through extraordinary turmoil with prices booming in some areas and crashing in others.
It is not just housing where economy theory turns into reality. In looking at the market for bananas, widgets, fine art or concert tickets, the interaction of supply and demand will always determine the price of those items. But let’s look at housing and think of the following issues and questions.
Based on detailed data from SQM Research, why is it that since 2012, house prices in Karratha Western Australia have fallen by around 65 per cent, while in the lower North Shore of Sydney, house prices have risen by around 120 per cent?
Balanced budget needs higher tax take, but which taxes should be hiked?
The treasurer, Scott Morrison, appears to be having something of a Gough Whitlam moment. Not in terms of far-reaching social and economic reform, but rather a realisation that the size of government needs to increase. The electorate is demanding a certain base level of healthcare, education, disability care, roads, defence, infrastructure and all manner of goods and services.
Morrison is talking about the need to raise taxes to ensure these government services are provided while simultaneously moving the budget towards surplus, which is an essential element to avoiding the credit rating downgrade that appears to be just around the corner.
He is explicitly acknowledging that, to keep voters happy with decent services, spending must remain above 25% of GDP and perhaps needs to rise further, towards record highs.
Prior to the Whitlam government in the early 1970s, government spending and revenue was generally at, or a little below, 20% of GDP. With the Whitlam reforms, this rose to about 25%, and apart from the swings in line with the business cycle and policy changes over the past 40 years, it has remained around 25%. It has not reverted to pre-Whitlam levels. Not gone close.