(2013) A Level H2 Econs Essay Q2 Suggested Answer by Mr Eugene Toh (A Level Economics Tutor)

(2013) A Level H2 Econs Paper 2 Essay Q2

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2. The Urban Redevelopment Authority (URA) announced that prices of private residential properties in Singapore rose by 1.3% in the third quarter of 2011, but the rise in the prices has been slowing for eight consecutive quarters. At the same time it reported that the total supply of new private residential properties nearing completion was at a record high.

Source: http://www.ura.gov.sg/pr/text/2011/pr11-135.html , accessed 28 October 2011

Discuss the different supply and demand factors and their likely importance in determining the reported changes in the prices of private residential properties in Singapore. [25]

Introduction

  1. The reported changes are that prices are rising - although at a slower rate

  2. There is likely both an increase in demand & supply, given that prices are rising, the extent of an increase in demand is likely greater than the increase in supply

  3. Demand for private residential properties are likely price elastic given that private residential properties are expensive and take up a large % of a person’s income

  4. Supply for private residential properties are likely price inelastic given the time taken for properties to be built ranges from 3-5 years

  5. Demand for private residential properties are likely income elastic given that private residential properties are more of a luxury goods compared to public housing such as HDB flats

Demand factors

Size of the market

  1. Due to an increasing number of foreign expatriates coming to Singapore to work, this has increased the size of the market for private residential properties → increase in demand for private residential properties

Price of related goods

  1. Federal Reserve and major world central banks have been progressively decreasing interest rates - Singapore being a interest rate taker, has also seen a fall in interest rates over the years

  2. Mortgages are complement goods for private residential properties

  3. As a fall in interest rates (prices of mortgages) will necessarily make mortgage payments cheaper → this will increase demand for private residential properties

  4. This is likely a key significant factor given the large fall in interest rates

Income levels of consumers

  1. An increase in the income levels of consumers as Singapore has been experiencing positive economic growth → increase purchasing power

  2. This would also likely be a significant factor given that demand for private residential properties is likely to be income elastic → increase in incomes → more than proportionate increase in demand for private residential properties

Supply factors

Prices of factor inputs

Cheaper raw material costs can reduce the cost of production for private residential properties → increase in supply

Government policy

By increasing the number of government land sales (GLS) sites → the government can increase the amount of land available for residential construction → increase supply for land → lower price of land → lower COP for private residential properties → increase in supply

Cumulative impacts on Private residential properties

  1. There is an increase in demand (when supply is price inelastic, a rightward shift in demand would likely lead to significant increase in prices - although such an impact is being moderated by an increase in supply)

  2. There is an increase in supply

  3. Given that reported price changes is an increase over the years, the increase in demand is likely of a greater extent than the increase in supply as illustrated in Figure 1 below

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