CASE STUDY INFORMATION - ASSESSMENT 1: CLASS PRESENTATION
You are provided with three articles from which you should choose ONE for the in-class presentation in week 5. From the chosen article you are required to:
(a) Identify the economic concepts and (10 marks)
(b) Explain and illustrate with graphs the identified economic principles. (20 marks)
You need to prepare 10 Powerpoint slides for the presentation.
ARTICLE 1
Title: The overlooked victims of Australia’s runaway property market
Johanna Leggatt is a Melbourne-based freelance journalist who covers property, arts, lifestyle, travel and interiors.
Young people may have been hit hard by Melbourne and Sydney’s steep property prices, but experts warn that soaring home values are creating victims at all levels of the market, including people who already own homes.
This week’s Household, Income and Labour Dynamics in Australia (HILDA) report showed that home ownership among 18 to 39-year-olds has fallen from 36 per cent in 2002 to a new low of 25 per cent.
On top of that, between 2002 to 2014, the average mortgage debt of young homeowners increased by 99 per cent in real terms, from $169,000 to $337,000.
But there are other victims overlooked in a national housing debate that focusses on the young.
An inflated property market has wide-ranging repercussions for many demographics, according to Greville Pabst, executive chair of WBP Property Group and a judge on The Block TV show. “Socially, you’re going to see a very big divide between the haves and the have nots,” Mr Pabst said.
Here are a few examples of the potentially overlooked casualties of Australia’s real estate boom.
Renters
It’s no surprise that many renters don’t fare well in expensive property markets, as the demand for rentals pushes up prices.
The latest Department of Health and Human Services’ rental affordability data revealed that a mere 5.7 per cent of new lettings were deemed affordable over the March quarter — the lowest since the report was first compiled in March 2000.
“Renters face the dilemma of paying off someone else’s mortgage and not building up equity in a property which can be a good form of security and wealth,” Bessie Hassan, property expert at Finder.com.au, said.
“There’s greater flexibility with being able to move around but they also don’t have the freedom to renovate or upgrade the property to suit their personal tastes.” Singles
Unfortunately for singles, the dream of home ownership is even tougher because they need to service a mortgage on one income.
“This can greatly affect the areas or regions where you can afford to live and your ability to manage the ongoing costs such as repairs and maintenance,” Ms Hassan said.
“Singles may need to reside within fringe suburbs as they’re priced out of inner-city suburbs.” In particular, pregnant single women may have to leave the workforce or pull back to parttime or casual work, which can impact their ability to afford a home, Ms Hassan said. “Single borrowers may also be seen as higher-risk borrowers [by banks] due to a lack of dual income.”
Owner-occupiers
While owner-occupiers have fewer problems than renters or singles, an inflated property market often leaves families or couples beached in the one spot for many years. Upgrading to a bigger home becomes too expensive once agent fees, marketing costs and stamp duty are taken into account. “If you’re selling a property for $1 million, then you are looking at paying at least $80,000 in stamp duty and associated costs,” property lecturer Peter Koulizos said.
“That’s money that could be spent on renovation instead. So people are staying put more; there’s less mobility.”
Greville Pabst at WBP Property Group added that many Generation Xers had secured mortgages at very low interest rates, but were also highly leveraged. “Interest rates will go up and some of these people may be in trouble.”
Retirees
While many pensioners own their own homes, they’re often saddled with expensive land tax bills.
“As the value of their property goes up so does their tax bill, which they struggle to pay because they’re asset rich, but cash poor,” Mr Pabst said.
Furthermore, according to the HILDA report, young adults are living with their parents longer: 60 per cent of men aged 22 to 25 and 48 per cent of women the same age were living with their parents in 2015, compared with 43 per cent and 27 per cent respectively in 2001.
Parents may own their own home, but it could be full of their adult children. Or they may find themselves digging into their retirement savings to help their kids onto the ladder. “Those that can afford it are now helping their children buy a home,” Mr Pabst said. “That is the great divide that is only going to increase.”
ARTICLE 2
Cost of avocadoes in Australia unlikely to rise amid global price hike 3 May 2017
Australian consumers can be 'confident there are no shortages of avocados' and prices will remain around the $3 mark in the coming year, according to industry group Avocados Australia. Avocados Australia CEO John Tyas has reassured Australian consumers there is no shortage of the fruit.
-Looking at the data that I've got in front of me, there's going to be no shortage of avocados in Australia right through the year until next year,- he told SBS News. His reassurance comes amid an avocado shortage in California (because of drought), Mexico (due to a growers' strike) and Peru (due to flooding), as well as increased demand in countries such as the US and China.
US per capita consumption increased from 1.6kg in 2006 to 3.1kg in 2015.
Since 2013, China's demand for avocados from Latin America has grown by 250 per cent per year.
The dark colour and bumpy-skin Hass avocados were retailing for AU $1.70 each in April 2017, up from $1.30 last year, according to US government data published by Bloomberg. However, Australia will be relatively unscathed by the reduced harvest and increased demand overseas, Mr Tyas said.
-I don’t think Australia is going to be significantly impacted,- he said.
Prices are forecast to sit around $2.80 to $3.00 for the next year, because it does not depend on avocado imports from the affected regions, he said.
Australians ate an average of 3.2 kg each in 2015-16. /
New Zealand exports about 80 per cent of its harvest to Australia – in 2016 it delivered 4 million trays or 20,000 tonnes. Queensland and Western Australia are also providing ample produce. In the year 2015-16, Australia produced nearly 67,000 tonnes of avocados.
Australia can produce avocados all year round because of its diverse range of growing climates - the Shepard variety from February to April, and the Hass variety from April to February.
However, Mr Tyas said there might be a price hike on imported processed products, such as avocado pulp from Mexico.
He added Asian countries relying on avocado imports from the Americas may experience a shortage, which might increase demand for Australia's produce.
Australia only exports 5 per cent of its produce, and most goes to Asia - Singapore, Malaysia, Hong Kong and Indonesia, with small amounts to Kuwait and the United Arab Emirates.
-I wouldn't imagine we would be exporting a lot more fruit that would create a shortage in Australia,- Mr Tyas said. -In terms of fresh avocados, what's happening in those countries shouldn't have a big impact.-
ARTICLE 3
Lower lows for electricity demand in Victoria by AEC
9th February, 2017
Demand for electricity in Victoria has been falling consistently since 2010 in line with falls seen in the National Electricity Market (NEM) overall. And while Victoria’s population and economic growth steam ahead the state is not seeing the same recovery in electricity demand. So why isn’t the state’s energy demand recovering?
Economic headwinds in South Australia and Tasmania (coupled with serious security issues in 2016 that dented annual demand) help explain the continued decline in demand in those states. In Victoria, rising energy efficiency, consumer response to rising electricity costs and structural adjustments in industry with the downturn in mining and manufacturing, have all contributed to the fall in demand.
Contraction in average power demand
Figure 1 below shows the contraction in Victoria’s average electricity demand. In 2016, demand fell 2 per cent to 5,130 MW compared to 5,290 MW in 2015. In comparison, Queensland’s average demand for electricity increased over 4 per cent in 2016, while overall NEM demand was flat. Queensland’s buoyant economy and the ramp up in LNG production increased that state’s electricity demand.
Figure 1: Victoria’s average electricity demand and annual growth (LHS)
Source: NEM Review, 2017
Figure 2 shows that Victoria’s share of NEM electricity demand is falling. The key factor is the structural adjustment underway in the economy with a shift away from heavy energy users, such as manufacturing and mining, toward services and construction, which are the sectors that have led the State’s economic growth.
Figure 2: Victoria’s electricity demand as a share of NEM demand
Source: NEM Review, 2017
Population growth (the highest in the nation at 2.1 per cent in 2015-16[i]) is contributing positively to economic growth and energy demand, but this is being offset by reductions in electricity demand from industry. Energy demand is generally underpinned by population and economic growth – as economic activity and output grows, so does the need for power.
Figure 3 shows that in 2015-16, the largest contributors to economic growth in Victoria were the financial services and construction industries each contributing 0.6 percentage points to the State’s growth[ii]. Manufacturing, traditionally a large energy consumer, detracted 0.2 percentage points from state growth highlighting the shift in Victoria’s industry mix toward services sectors which use relatively little energy for production compared to manufacturing, mining and refining.
Figure 3: Victoria’s industries by contribution to state growth 2015-16 (% points)
Source: ABS, 2016, National Accounts: State Accounts.
These key industries that would normally have contributed to Victoria’s electricity demand are facing commercial pressures and lowering production, or winding down operations altogether. Manufacturing in Australia and Victoria has been in decline as car manufacturing and processing of petroleum and mineral resources close or reduce production. In Victoria, the decisions to wind down Holden, Ford and Toyota were taken several years ago. While the full effects will take time to filter through the State economy (Ford wound down, then closed operations in Victoria in 2016 while Holden and Toyota plan to close later this year), the closure of these large operations is flowing (and will continue to flow) onto the many parts manufacturers that supplied car makers in Victoria. Figure 4 and 5 below show the reduction in national manufacturing production and employment in Victoria respectively[iii].
Figure 4: Manufacturing industry gross value added production
Source: ABS, 2016, National Accounts: State Accounts.
Figure 5: Manufacturing employment in Victoria (number employed ‘000)
Source: ABS, 2016, Detailed Labour Force Statistics.
Victoria’s electricity demand also fell as a result of the modest world demand growth for aluminium[iv] and the closure of Point Henry aluminium smelter in 2014. While in 2016 the Portland aluminium smelter reduced production following a blackout in December. Alcoa will continue to operate the Portland aluminium smelter in the near term. However, the outlook for aluminium production is for modest growth with export unit value forecast to rise 1 per cent in 2017-18[v].
Table 1 below compares the actual outcome for 2016 electricity demand with the Australian Energy Market Operator’s (AEMO) forecasts published in mid-2016[vi]
Table 1: Electricity demand (MW), state and NEM, 2016
Source: AEMO, NEFR 2016 and NEM Review 2017.
Falling average electricity demand in Victoria has been accompanied by falling minimum demand. This is due to the lower industry energy demand mentioned above, energy efficiency measures and the uptake of solar PV. Large manufacturing and refining operations are unique in their energy use because they require a constant, large supply of power. The reduction in demand from large energy users can be seen in the declining minimum demand over a number of years (Figure 6 below).
Figure 6: Minimum demand in Victoria and linear trend
Source: NEM Review, 2017
Lower minimum demand outcomes create challenges for energy security and planning for infrastructure investments. Falling minimum demand, combined with the uptake of distributed generation, such as solar PV and battery storage, mean that in the future at some times of the day, demand needed from the grid could fall to zero. In 2015, AEMO forecast that, by around 2023–24, South Australia’s minimum demand from the grid would fall to zero, meaning rooftop PV alone would supply all customer demand at times[vii]. This may cause network stability and operational issues, such as voltage and frequency control challenges. As demand from the grid fluctuates during the day, the market operator uses firm generators to adjust their output to regulate voltages and frequency in the network and keep the lights on. If all generators are offline due to low demand, the market operator would not have these tools available to them. In the long term, if Victoria’s minimum demand continues to trend down, challenges to secure and reliable power supply will need to be addressed.
For now, the amount of surplus energy in Victoria’s network is high given the declining electricity demand resulting from structural shifts in industry. Figure 7 below shows the rise in average surplus generation in Victoria. When Hazelwood power station closes in March, around 1,542MW of capacity will be removed from the Victorian region, which will tighten supply. Although incentives under the national Renewable Energy Target and Victoria’s planned Renewable Energy Target are likely to drive more generation into the mix, this may result in new plant that is not oriented to contribute firm supply to meet demand peaks or provide security services to the market operator.
Figure 7: Surplus generation in Victoria and closures of large energy users
Source: NEM Review, 2017
Note: Surplus generation is measured as total generation made available at a facility minus energy demand.