Context: Consumers purchase a house or multiple dwellings for a number of reasons. But what is the rationale behind their decision to buy and/or sell a house, flat or apartment? Do consumers generally exhibit rational or irrational behaviours in their choices? Are people calculative machines i.e. working out all the pros and cons of the good with pinpoint precision, or are consumers more so bounded in their rationality? What does economic theory say about this vis-à-vis the buying/selling of a residential dwelling? Increasingly also, especially in recent decades, real estate (housing) is seen as a speculative asset to make money on rather than simply as a place to live and raise a family. But there can be a negative impact on society as a result of individual (micro) actors involved in the buying/selling of real estate, leading to speculative bubbles. When a housing-price bubble bursts below its fundamental values, then this can lead to social dislocation in the economy.
There are two parts in this 1,600–1,800 word Essay,
Part 1: Applications of Traditional vs. Behavioural Economics
Explanations [700–800 words]
Using standard consumer choice theory, describe the decision-making process of purchasing a residential dwelling to increase well-being. Discuss in some detail what behavioural economics suggests about the decision-making process of buying or selling a residential dwelling, and about whether people make such decisions that maximise their well-being.
Part 2: Speculative Housing-Price Bubbles [800–900 words]
Examine the specific characteristics of speculative bubbles in the real estate (housing) market before and during the Great International Crisis of 2008–2012. Referring to specific times and areas (e.g. cities or suburbs within Australia, or from a country of your choice), provide a sound analysis of the link between housing-prices and fundamentals.
Hints & Tips:
• Make sure you don’t talk about the economic theory in abstract terms. Linking theory with the topic is the key.
• Where relevant include well-labelled diagrams in your answer, particularly when describing the mainstream theory of consumer choice in Part 1.
• Include relevant real-world exs in your answer (where possible).
• Do not quote Wikipedia or Investopedia as published sources, and be wary of real estate agents who tend to “talk up” the market.
• In the main, particularly in Part 2, you may restrict your search to articles available on the Internet. However, a good and creative use of references and data sources from several academic journal articles will earn you a higher mark.
• Some academic economic journal articles on ‘speculative bubbles’ are heavily econometric in nature, but please do not fret about this. Focus on the economics and intuition of the link between housing-prices and fundamentals. That said; do incorporate several graphs, data, tables and/or figures—where relevant to aid your assessment of the evidence.
• You may find some overlap of ‘behavioural economics’ in Part 2 when specifying the characteristics of speculative bubbles (e.g. the nature of herding might be significant in your analysis).