The article chosen for the analysis is from the Economist and is titled “Prices of Prime Properties Around the World Are Falling”. The article analysis why the prices of prime properties have reached a peak and are on the verge of experiencing a significant drop in their prices. The falling in the prices can be seen in different cities and locations such as Hong Kong, London, New York, Vancouver, and Sydney. Home prices had climbed steadily for several years after 2009 and are now experiencing a significant decrease in their prices. This paper analyzes the article “Prices of Prime Properties Around the World Are Falling” by considering how the changes in demand, supply, and equilibrium pricing have affected the prices of prime properties around the world.
The article points out through the use of various pieces of evidence that the prices of products in major cities are starting to fall. For instance, the prices of prime properties in Vancouver have fallen by 12% over the past year. Prices started falling on August 2018 in Hong Kong and have since dropped by 9%. In Manhattan, prices have fallen by 4.3% over the last year and 60% of homes that were offered for $1 million or more failed to sell. In Sydney, the prime prices have gone down by 16% since 2017. The article further points out that London prime property prices may have fallen by 20% from the year 2014. The sales of homes that were worth over $1 million are currently 20% lower than their value in 2016 (“Prices of Prime Properties Around the World Are Falling”, 2019). The decrease in the prices of prime properties can be seen in Appendix A.
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Demand and Supply
The falling in prices of prime properties can be seen to be as a result of a direct relationship between demand, supply, and equilibrium prices of products in the prime properties category. According to the law of demand, if other factors remain equal, the higher the prices of a good, the fewer the people will demand that good. The relationship can be seen in Appendix B The prices of prime properties also followed a similar relationship. Between 2009 and 2017, the prices went high and this resulted in a reduction in the quantity of products demanded. The reduction in the quantity of products demanded led to a significant decrease in prices.
The law of supply follows that the higher the price of a product, the higher the quantity supplied. Producers become more willing to supply products at a higher price since higher prices increase revenue. This relationship can be seen in Appendix C. Between 2009 and 2017, most cities experienced massive growth in the prices of prime products and this resulted in more investors entering the market. According to the article, there was a massive wealth creation ability and a boom in technology meaning that many investors could view the opportunity and invest in it. The rising number of millionaires at 250 per hour over the past eight years also resulted in an increase in supply (“Prices of Prime Properties Around the World Are Falling”, 2019).
When supply and demand become equal, the supply function and demand function intersect, and the economy is said to be at equilibrium. At such a point, the allocation of goods is efficient since the amount of goods being supplied is exactly the same as the amount of goods being demanded (Hayes, 2019). The relationship can be seen in Appendix D. With prices falling, one can conclude that the prices of prime properties are approaching the equilibrium state. The current state is that supply exceeds demand due to the high prices of products. Prices are thus falling so that the quantity of prime properties supplied would match that which is currently being demanded.
The above analysis shows that the prices of prime properties, housing, and real estate follow demand and supply. The analysis of housing demand and supply was carried out by Chow and Niu (2015). The study established that the rapid increase in urban residential housing price can be explained through the forces of demand and supply. The study further established that income determined the demand and cost of construction affected the supply. Other factors that could affect the demand and supply of housing was analyzed by Wong and Ho (2017) by analyzing housing in Hong Kong. The study established that factors which affected the demand were housing property price, income, price expectation, interest rate while factors that affected the supply were property price, building and land costs, interest rates, and private housing completions. It can be seen that property prices are one of the critical factors that affect the demand and supply of housing units.
In conclusion, the article chosen from The Economist titled “Prices of Prime Properties Around the World Are Falling” follows the relationship of demand, supply, and equilibrium prices. The falling in prices of prime properties has been experienced in different cities such as New York, Hong Kong, London, and Vancouver. This can be seen to be as a result of a decrease in the quantity demanded and an increase in the supply. High prices led to a higher supply but this did not match the quantity demanded. The result is that prices start going down as experienced seen in the analysis of the article. The prices will go down until an equilibrium point is reached where the quantity demanded matches the quantity supplied.
References
Chow, G. C., & Niu, L. (2015). Housing Prices in Urban China as Determined by Demand and Supply. Pacific Economic Review , 20 (1), 1-16.
Hayes, D. (2018). Economics Basics: Supply and Demand. Retrieved from https://www.investopedia.com/university/economics/economics3.asp
Prices of Prime Properties Around the World Are Falling. (2019, March). Retrieved from https://www.economist.com/finance-and-economics/2019/03/09/prices-of-prime-properties-around-the-world-are-falling
Wong, G., & Ho, L. (2017). Policy-driven housing cycle: The Hong Kong case of supply intervention. International Real Estate Review , 20 (3), 375-396.
Appendix A
Appendix A: Changes in Prices of Prime Properties Between 2009 and 2018. Reprinted from https://www.economist.com/finance-and-economics/2019/03/09/prices-of-prime-properties-around-the-world-are-falling
Appendix B
Figure 2: Demand Relationship. Hayes, D. (2018). Economics Basics: Supply and Demand. Reprinted from https://www.investopedia.com/university/economics/economics3.asp
Appendix C
Figure 3: Supply relationship. Hayes, D. (2018). Economics Basics: Supply and Demand. Reprinted from https://www.investopedia.com/university/economics/economics3.asp
Appendix D
Figure 4: Equilibrium intersection. Hayes, D. (2018). Economics Basics: Supply and Demand. Reprinted from https://www.investopedia.com/university/economics/economics3.asp
