Case Study - The Middle-income Housing Market

A principal objective of consumers is to own their homes and there has been much talk about

real estate & construction boom in the local market as is evident by the increased contribution of

construction to GDP. Yet in this fertile environment the price of middle-income housing continues to rises as demonstrating the basic principles of microeconomics that unmet demand coupled with low inventory, as is the case of the middle-income housing segment, will push up prices.

Assume that the availability of middle-income housing in the local market declined by 10% over the past five years and remains lower than that of high-income housing. Some have argued that the inadequate supply of houses in this income bracket is bordering on "crisis' situation. Persons on the lower range of the middle-income bracket have been particularly impacted as low supply pushes prices out of their affordability reach. As the options to purchase their own homes become increasingly difficult the need for rental continue to increase which negatively impacted prices in the rental market.

A number of factors could have contributed to the limited availability of middle-income housing, for example the shift of producers' resources to high income houses which, though fewer in quantity when sold, may provide a larger profit margin. Migration from rural to urban areas increases the demand for affordable housing without the commensurate increase in supply. It is fair to argue that income is also a factor. The estimated average monthly salary and percentage of income spent on housing are indicated in figure 4 below. Despite income gaps, consumers continue to prioritize home ownership.

Additionally, mortgage rates prior to 2021 have declined in the local market. According to an article by Lalaine c. Delmendo "In September 2020, the average interest rate for mortgage loans in commercial banks in the country was 7.38%, down from 7.82% a year earlier and the lowest level in nine years, ......... For building societies, the average mortgage loan rate stood at 7.5% in September 2020, down from 7.93% in September 2019 and the lowest rate ever recorded." Since then, rates have started to increase closing 2023 at 7.40% for commercial banks and 7.82% for building societies.

Given the information provided as well as subsequent information that may be added to the case as part of scenario surrounding each question, answer the following questions

1. It is sometimes argued that trade can help a country to address gaps in their local

product market. Explain international trade and identify two (2) benefits of trade that you believe could help to address the housing gaps in this market.

2. Assume that Country X and Country Y both produce two raw materials used in housing construction: cement (C) and lumber (L).

The following table shows the amount of labour required to produce one unit of each raw material in each country:

Country Cement (C) Lumber (L)

Country X 5 hours 4 hours

Country Y 4 hours 6 hours

a) What would be the opportunity cost of producing one unit of cement and one unit of lumber in each country.

b) How do we know which country has an absolute advantage in the production of each raw material and explain why

c) How can we determine which country has a comparative advantage in the production of each raw material and explain why

d) How can we explain the rule for specialisation and indicate which country should specialise in cement and which one in lumber why.