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Supply of housing in the short run

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A recent proposal to help make housing more affordable in Australia is to allow first-time homebuyers to use their superannuation savings (that is, compulsory retirement savings) to help pay for a house. This proposal has been criticised by a number of politicians, commentators, and economists. One such criticism came from UNSW Professor Richard Holden, who tweeted, "Using [superannuation] to buy housing shifts money directly from young savers to old sellers. Complete own goal. 1st year econ-level stuff."

Use this information to answer the following questions. You may assume that the market for housing is perfectly competitive.

  1. Is the supply of housing in the short run likely to be elastic or inelastic? Explain your answer.
  2. Using a graph, briefly explain how this policy is likely to affect the market equilibrium price and quantity of housing in Australia.
  3. Based on your answers to parts A and B, explain whether the predictions of the demand-supply model you have studied in this course are consistent with Professor Holden's statement that this policy would "shift money directly from young savers to old sellers."

Reference no: EM131489521

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