Application Exercise 10f: Covid and worsening wealth inequality
- Describe the main reason why Australians’ wealth on average rose during the pandemic.
The main reasons why Australians’ wealth rose on average during the pandemic are rising house prices. Those who own property saw the value of their major asset/s – their owner-occupied home &/or their investment properties – rise rapidly. Residential property values rose on average 22% over 2021.Two-thirds of the increase in wealth came from house price inflation.
- Explain why rising housing prices moderated overall wealth inequality during the pandemic.
Because housing ownership is distributed more evenly across the population than other kinds of wealth (e.g. investments, cash deposits, business ownership, other assets), rising house prices moderated the increase in wealth inequality.
- Describe the trend in the proportion of wealth held by the top 1% of households since 2003. Explain the likely implications of this trend for income distribution.
The trend in the proportion of wealth held by the top 1% of households has been an overall upward one since 2003. The proportion rose from 12% in 2003 to 15% in 2018 and fell only slightly to 14% in 2021.
- Use the Internet to investigate the percentage of Australians who own property (either outright or with a mortgage) and make a list of arguments in favour of and against the benefits of rising housing prices.
Approximately one-third of Australia’s households own property outright, while another third owns an owner-occupied property with a mortgage. The other one-third of households are renters.
Benefits of rising housing prices include:
- increased wealth for those who are already in the property market
- increased average wealth across the country (given that two-thirds of households are home owners either with or without a mortgage.)
- Rising housing prices can encourage more spending across the economy, encouraging economic growth (increased production) in response to increased spending.
- Increased stamp duty (a tax paid to State Governments) on housing sales, leading to increased revenue that can be spent on provision of infrastructure and services by those governments.
- Can encourage increased supply (expansion in supply), as increased profits can be made.
Costs of rising housing prices include:
- difficulty in accessing home ownership as housing becomes less affordable for those who are not yet in the housing market (i.e. potential first homeowners)
- harder to access mortgages as houses become more expensive – can encourage increased risk taking in borrowing for a mortgage
- Higher housing prices can lead to higher rents – since investors who borrow to buy housing to then rent out have to incur higher costs to supply rental properties
- Can lead to boom-bust cycles in housing price inflation