Economics Internal Assessment- Microeconomics

Course: IB Economics HL Commentary number: 1 School name: International School of Brussels Candidate name: Filippo Maggioni Candidate number: Date commentary was written: 18 February 2013 Section of the syllabus to which the commentary relates: Section 1 Microeconomics Word count: 788 Source of extract: Unknown author, 1 February 2013, China house price rise accelerates in January at: http://www.channelnewsasia.com/stories/afp_asiapacific_business/view/1251592/1/.html

China house price rise accelerates in January

Posted: 01 February 2013 1623 hrs

BEIJING: China's house price increases picked up pace in January on the back of a recovery in the overall economy and signs of looser policy controls, an independent survey showed on Friday. The cost of a new home in 100 major cities averaged 9,812 yuan ($1,577) per square metre last month, rising 1.2 percent from a year ago, the China Index Academy (CIA) said. The increase accelerated from a 0.03 percent rise in December, when housing prices grew year-on-year for the first time in nine months. Prices rose 1.0 percent from December, the eighth consecutive monthly increase, CIA said in a statement. Property costs are a key social issue in China, where millions of would -be buyers have been priced out of the market, fuelling resentment. The central government has sought to control residential property prices for the past three years, with measures including restrictions on second and third home purchases, higher minimum downpayments, and annual taxes in some cities on multiple and non-locally-owned homes. The moves cooled the once red-hot market, but demand remains pent-up and government monetary policy has eased in recent months. CIA said market sentiment was improving after an increase in property transactions and the housing ministry said it supported non-speculative demand -- a possible signal of looser controls. "The stabilisation and rebound in the economy, the stabilising and easing policies, the recovering market confidence and optimism among all parties helped home prices in the first month of 2013 continue the momentum at the end of 2012 to increase and at a bigger margin," it said in a statement. More cities saw rises in new home prices last month than in December and increases were faster in firsttier cities and areas along China's coast, it added. The average new home price in Beijing stood at 25,075 yuan per square metre, rising 2.27 percent in a month and up 5.93 percent year-on-year. In Shanghai, it was 27,655 yuan per square metre, up 2.3 percent from December and 1.72 percent higher from a year ago.
CIA is owned by SouFun holdings, China's biggest real estate website operator. New properties are the most important part of China's real estate market and the surve y covers prices of both houses and apartments, including flats with prices regulated by the authorities. Data is collected every month by on-the-spot surveys and through reports by estate agents, property developers and officials.

Commentary The article discusses what in China has become an extremely pressing issue: the very house prices. As mentioned, the prices, rose 1.0 percent from December, the eighth consecutive monthly increase; the Chinese government therefore has found itself in trouble, as housing prices are a delicate issue in China, fuelling resentment amongst the poor as theyre excluded from purchasing due to excessively high prices. Due to this, the central government has taken various actions (the aforementioned ones, namely) in order to lower the demand and thus the the price and the demand for housing., but as its policies have eased lately, demand has grown back and is still a relevant issue. Firstly, some relevant economic terms are to be defined. An indirect tax is a financial levy imposed upon the taxpayer by a state, and more specifically one imposed upon expenditure; as the articles in an annual one, it means it is collected once a year. A specific indirect tax (which is what the tax in the article is assumed to be) is a fixed amount of tax, charged on each unit of output. Demand in addition, is the amount of a good or service consumers are willing and able to buy at a given time and price, ceteris paribus. Factors determining the demand for a good or service include income, possible government legislation such as taxes, the price of substitute and complementary goods, and then good being an inferior good or a normal one. The two first measures, restrictions on 2nd and 3rd house purchases and the higher minimum downpayment amounts, had an impact on market for housing, as shown visually in the graph below.
Price of Housing in China (Yuans) Effect of Restrictions on 2 nd and 3rd Houses Purchases/ and Higher Minimum Downpayments on the Housing Market in China S1

P1

Eq1 Eq2

P2

D1 D2 Q2 Q1 Quantity of Housing in China

The graph displays the effect of these two pieces of legislation, as they will result in a leftward shift of the demand curve. Firstly, the initial equilibrium market price of P1 (assumed, due to the information given in the article, to be quite high) and equilibrium quantity of Q1 were determined by nearly unregulated (or loosely, as mentioned in the article, regulated) supply and demand. However, the restrictions on purchases of second and third houses would clearly cause a decrease, and therefore a leftward shift, in the demand, as people interested in purchasing for such purposes would be discouraged to do so. Furthermore, higher minimum downpayments would ensure the demand curve to further shift leftwards, as a part of the potential consumers would be discouraged by the higher amounts of required money to be ready at-hand. The combination of these two shifts will then result in the new demand curve, D2 (shifted from the original D1) which will in turn produce new, and reduced, equilibrium price of P2 and equilibrium quantity of Q2, thus technically achieving, at least in part, the Chinese governments goal of lowering housing market prices, and trying to cool demand.and produce a new equilibrium at (P2,Q2), at a more sustainable level for China, as demand will have effectively been cooled. Another important measure the government undertook, as discussed in the article, is the annual tax on multiple and non-locally owned homes. The graph displaying the effect of such specific tax (once again, assumed to be specific) is shown below.
Effect of Annual Tax on Multiple/ and non-Locally Owned Homes on the Housing Market in China Price of Multiple and non-Locally Owned Homes in China (Yuans)
Formatted: Indent: First line: 0"

Formatted: Subscript Formatted: Subscript

S1 + tax

S1

P2 P1

Eq2

Size of Tax Eq1

P3 Quantity of Multiple and non-Locally Owned Homes in China (Yuans) Q1

Q2

In this case, again, the market for housing initially was stable at an the equilibrium price of (P1, and a quantity of Q1). However, as the specific tax was implemented, it wassupply contracted thus causing an upwards shift of the supply curve to create a new

equilibrium at (P2, a higher price, Q2, a lower quantity). charged on the supply, increasing overall costs for the producers (or suppliers, in the housing case) and therefore resulting ultimately in a final equilibrium at a higher price, P2, and a lower quantity, Q2. This would actually mean non-locally owned homes and multiple (2nd, 3rd, etc.) homes would become more expensive, and therefore with a lower quantity demanded. It would indeed prove the governments policy successful, as there would then be less competition and demand in the housing market as a whole, and people looking to buy a first home would be advantaged in doing so, at a cheaper price. Overall effects on the involved stakeholders will clearly vary, especially noting the lack of success the governments measures have proven. Technically, on the consumer side, the less wealthy part of the population should benefit from these measures, as the restrictions on second and thirdnon-first home purchases and higher minimum downpayments should lower the market price for houses, while the annual tax should decrease competition in part, by excluding, or becoming an obstacle, to the wealthy portion, the one looking to purchase second or non-locally owned homes. A downside to this will be that for the poor relying on long-term mortgages, higher downpayments will be an obstacle. Protest, on the other hand, might arise from the wealthy portion of the population interested in housing, as well as from the producers, who, after the annual tax, might be finding themselves only with revenue of P3xQ2, rather than the more considerable amount they were earning before (P 1xQ1). The government itself, finally, will be benefitting financially from the tax, obtaining revenue of Q2x (P2-P3) yuans. It should be kept in mind that, ultimately, the increases and prices in housing, and therefore availability to the poorer end of the population, will also depend on the single areas or citys price of elasticity of demand (PED, the percentage change in quantity demanded with respect to the change in price), since, for instance, increases were faster in first-tier cities and areas along China's coast.

Formatted: Subscript Formatted: Subscript