Australian Housing Market - Cigarette Tax - Assignment Example

ECONOMIC THEORY IN ARTICLES Name: Course: Tutor: University: City and State: Date: Section One: Ciggarette Taxes Question 1 In the article written by Ashley Hall, the main issue presented is the taxation hike in the cigarette prices that caused a widespread uproar from tobacconists and smokers. The taxation was confirmed by the Prime Minister Kevin Rudd who stated an additional of 25 per cent resulting to an increase prices by $2.16 per pack of 30 cigarettes. He also added that the government has implemented an anti-smoking campaign which had issued a crackdown on internet advertisement on smoking. The reason behind this government decision was to reduce the number of smokers which would result to a drop in the tobacco purchases by the public. Another reason for increment on tobacco was to enable the smokers to utilize their finances on the basic necessities rather than funding their smoking habits. The government aimed at reducing the overall tobacco consumption by an approximated 6% resulting to a drop of 87,000 smokers. These drastic changes solicited a negative response from the tobacconists who criticized the government move by reiterating that it was nearly impossible to alter the changes within the limited allocated time. The sales and operations manager at Freechoice franchise, opinionated it was physically impossible to get ready by midnight. They critiqued the move by stating that it was a futile attempt as the changes were irrational and too drastic considering the time to implement the changes. The action also created a retailers and customer scramble where the customers made more purchases of tobacco packets as compared to the prior times. The retailers as said to be willing to buy out the stocks of tobacco supply shops which would results to great profit margins after the implementation of the taxes Question 2 The major stakeholders affected by the tax increase were the Charity societies and the tobacco franchises. The franchises were negatively impacted as the move was drastic and nearly impossible to set up measures that would counteract the tax increase. The move which was aimed at smashing the tobacco business also disorganized and was met by dismay from different tobacco franchises who wanted more time to develop and organize new pricing strategies to counteract the increased taxes. The franchises held the opinion that the increase on taxation would lead to a scramble as most smokers would do anything to access the product before the implementation of the taxes even if it meant making more purchases beforehand. The other affected party was the Charity societies. The next major impact was on the Charity workers who were disappointed by the speed of the tax increase. The believed the greater percentage of the smokers were from the low income category thus instead of tax increase which would prompt them to spend their finances on cigarettes, the government would have aimed at creating awareness on the benefits of choosing a healthier lifestyle. The senior researcher with the St Vincent de Paul society, Dr Andy Marks listed a number of impacts the tax increase will have on the smokers living below the poverty line. These impacts were that most individuals failed to acquire basic necessities and an increase in the number people seeking assistance. However, this opinion is not shared by the executive director of Quit Victoria, Fiona Sharkie, who estimated a decrease of 100,000 people who quit smoking and a figure of 25,000 children who were less likely to take up the habit. She also mentioned that there was a high possibility of low income smokers to quit smoking after the tax increase as they could not afford to finance the habit. She estimated that they would be forced to cut down their habits by at least two cigarettes per day. Question 3 There are several theories that can be deduced from the article. They include elasticity and demand. This theory creates equilibrium between the elasticity of a market and the demand of the products. Several laws are deduced from this relationship such as the law of the price elasticity of demand and the law of demand. These principles are employed to deduce relevant conclusions from the markets sales. In the case study, there is reported retailer scramble prior to the implementation of the increased cigarette prices. This is prompted due to the increase of taxation leading to the price increment by 25%. The law of demand states that the consumers respond to fall in price by purchasing more of the product. In this instance, the price before the tax increase prompted more purchase by the retailers and consumers due to the increased demand prior to the impending price increment. The elasticity is the overall measure of the reaction in demand due to the price change. The retailers responded by buying out huge amounts of tobacco from the distributors at a cheaper price so as to gain profits after the price increase. The estimated purchases were three to four packets by the customers compared to the normal one packet and the retailers were said to be buying out stock as compared to previous average purchases. Another law of demand implicated is that the higher the price of a product the smaller the quantity demanded. This is clearly illustrated when there is an approximated decrease of 100,000 smokers who quit the habit due to the increased prices, according Fiona Sharkie. The drop resulted to decreased purchase of cigarettes thus smaller quantity demanded as a change in price is seen to lead to a movement along the existing demand curve and results in a change in quantity demanded. Basically the type of elasticity in this type of market is relatively elastic. The following graph shows the relationship between the variables aforementioned. Another notable economic theory portrayed is the government intervention in an economic market. The move by the government to increase taxation on tobacco greatly interferes with its demand and supply. They implement an excise tax that is imposed on each packet of tobacco resulting to an increased demand prior the tax increase and decreased demand after the implementation. Due to the dependant relationship between demand and supply, the same results in supply are observed in both cases. The effects experienced due this excise is the shift of the supply curve where the equilibrium quantity fall after increases in price and reduced demand and the size of market is reduced when the number of smokers quit their habit or spend their finances on the basic necessities. Section Two: Australian Housing Market Question One The deduced information from the article published by Christopher Joye is Australia housing market which is worth $4 trillion is now being overvalued by an approximated 10% with the values being stretched with each passing day. This overvalue has propelled Australia to top the list as the most expensive residential property in the market history in real estate. The Reserve bank of Australia decided to reduce the housing cash rate to 2.5% which resulted to the opening of the 4.8 % mortgage rates which was likely to contribute to the development of a destabilizing bubble due to the increase in housing inflation rates. The argument forwarded was that the housing market prices were already perfect as the home values were supposed to remain affordable to avoid outstripping the clienteles’ income. The major concern was that an increase in prices by a minimum of 10% was likely to triple increase in house prices making it very expensive to purchase homes in Australia. The observed trend in the housing market is an increase of more than 10% as per March 2014. In the metropolitan population which is largely based in Sydney and Melbourne, housing prices faced a 15% and 11% increase. The comparison drawn out by an evaluation benchmark cited by the RBA was that the increase in housing prices mirrored those which occurred in June 2006 and June 2010 and later faced a drop of 6.1% in 2008 and 6.6 % in the 2011-12. The evaluation of the gradual increase in prices created an alarm after a 4.1 times increased ratio between the average dwelling places and the average disposable salaries per family. This value was estimated to be effective as from March 2014. It was more alarming because it neared the value presented by the high watermarks between 2006 and 2010. The reason for the issue of increased housing prices was majorly because of this observed value in the ratio. This increase implicated that it would hard for the average Australian citizen to purchase homes at affordable prices. This issue was forwarded to the RBA so as appropriate strategies could be devised to counteract the increase. The change in the ratio impacted the national clearance rates that were observed to be hitting the highs of 70% which was a direct comparison to the 2009 enthusiasm to induced low rates and the first time buyers bonus provided by the government. Another impact of the change was on the speculative investment activity had been on the rise following its promotion by the private sector funds. It has also affected proportion of citizens making the down payments on their mortgages due to the low borrowing rates which has been a throwback to the economy to the pre-global financial crisis levels. Question Two The impact of the increased housing rates affected a couple of stakeholders that included the land investors and the home owners. They faced a difficulty in coping with the ever fluctuating ratio rates that went as high as thrice the normal rates. The rates implicated a drop in the purchasing of houses especially in the metropolitan areas such as Sydney and Melbourne where the increase was at its peak. The impact on the investors was negative as it discouraged investment in the real estate business due to reduced demand from the clients. The investor make up the greater proportion of the new loan approvals in Sydney thus were more inclined to approval “interest-only” loans that were recorded at a spill over the quarter with buyer with deposits less than 10% of the property’s value contributing to the high 15% of the loan approvals after the reduced rates of 10% in the GFC. Potential homeowners faced the issue of the low borrowing bank rates in the country that would assist in making deposits for the house purchases. This is illustrated when the Reserve Bank of Australia decided to reduce the cash rates to 2.5 % low which resulted to the increase of mortgage rates to 4.8 % which eventually promoted to the destabilization bubble. An additional stakeholder impacted by the increased rates was the auctioneering firms. This is depicted when the auction clearance rates were consistently increasing above the third quarter percentile imitating the 2009 rates. Question Three The economic theories that are majorly focused on in the article include principles of supply and demand, accounting and economic profit and legal monopoly. The type of elasticity illustrated by the real estate market is a monopoly in the sense that the RBA has the overall control of the mortgage rates outlined for all the real estate firms nationally. It has control over the housing market with creates a barrier for entry for firms that are no ready to comply with the mortgage rate. The legal aspect of this type of monopolistic market is due to the fact that the Reserve Bank of Australia is a governmental bank as it is the central bank which is involved in the major governmental fund and transactions. In the monopolistic market the firm which in this case is the RBA is the sole seller or provider of the product which is the mortgage rates. To illustrate the effect of demand and supply from the drastic increase in the mortgage rates and the effect on the overall demand by the potential homeowners is depicted when it is contrasted to the first-time buyer frenzy in 2009 where there was high demand in housing thus more supply of mortgage services by the RBA and more clients making deposits. The recent boom is said to mirror the 2002-02 which has seen the development of a destabilizing bubble with affects the variable considered in mortgaging, which are the disposable income per family and the house prices. The higher the increase in mortgage the lesser the purchase of home, this rule mimic the law of demand. The alarm sounded by the Financial Review newspaper was after the ratio increases by 4.1 fold which was compared to the high watermarks that experienced between 2006 and 2010 which was at average of 4.5fold. The ratio has actually become more alarm at 4.4 as per March 2014. Question Four Another issue that should be discussed includes the progress that has been observed in an attempt to stabilize the mortgage rates and housing prices in Australia and the issue of RBA addressing the escalating inflation bubble. In response to the increased housing prices, the RBA assures the homeowners and investors there are probable indicators potential lenders using non stringent serviceability assessment and signs of an increase in the high LVR lending in the major banking facilities. However, there is no valid evidence in the stabilization of the boom The rationale behind the difficulty presented in RBA’s acknowledgment of the bubble is the existence of conflicts between monetary policy goals and the directive which implies financial stability. These two components ensure necessary measures are setup to prevent imbalances which are caused by the aforementioned bubble. Acknowledgment of the bubble implies that the bank has failed in preventing imbalances and lacking assurance on the financial stability. The documentation of the macro-prudential have created considerable amount of doubt leading to the questioning of their validity by the government. They include the implementation tools such as lending limits which implied that the probable best solution for the housing inflation rates. The RBA was placed in a position whereby it has to comply with the pressure by increasing customer repayments by an estimated 30%. The impending issue was that if the rates mirrored the 2007 rates then there it was highly probable that it they could a high of over the 8% mark. The above described outcomes posed an advantage which was the stabilizing of the rates as the potential homeowner reduced their expected values on capital profits. Despite this advantage, the buyers are advised to be aware of their house purchasing transactions as there are consequences that suggested that 60% home loans would face an estimated 5% drop in value of properties present in the balance sheets. Bibliography Joye, Christopher (2014).Property prices headed for the record high. Financial Review.28 March 2014, n.p Hall, Ashley (April 30, 2010). “Cigarette tax hike sparks panic buying”, ABC news. Read More