MI 2024 PU3 H2 Econs Prelim P2 Suggested Ans for Sharing

2024 PU3 H2 Economics (9570) Prelim Paper 2 Suggested Answers 1 1 In 2021, in response to a large rise in residential property prices, the Singapore government raised the Additional Buyer’s Stamp Duty (ABSD). This is a tax that buyers must pay for purchases of residential properties. The authorities also pledged to increase the supply of both public and private housing to meet demand. Source: Monetary Authority of Singapore, December 2021 (a) Explain why there might be a large rise in residential property prices in Singapore. [10] (b) Discuss the effectiveness of the above measures to ensure that the residential property prices remain stable in Singapore. [15] Command word Explain why – reasons Concept Large rise in prices – demand and supply factors, price elasticities of demand and supply Context Property prices in Singapore R1: Explain how DD factor and PES leads to a large increase in prices of residential property in Singapore R2: Explain how SS factor and PED leads to a large increase in prices of residential property in Singapore Requirement Suggested answer Introduction Given Singapore’s land constraints, there is a limited amount of land that can be allocated residential properties. This coupled with aspirations of Singaporeans to own home as higher prices caused by an increase in demand and a limited supply. R1: Explain how DD factor and PES lead to a large increase in prices of residential property in Singapore • There has been an increase in demand for residential properties in Singapore. This can be due to any of the following factors: o There has been increase aspirations of the population to own their own homes, even from single children who prefer to live on their own away from their parents. This change in taste and preference towards buying a residential property has resulted in an increase in demand. o At the same time, as Singapore recovers from Covid -19 and the economy opens up, the incomes of households have increased. Given the residential properties are normal goods, where a rise in income leads to a rise in demand (i.e. Income elasticity of demand (YED) > 0), the demand for residential properties will rise in tandem with income. o With the economy opening up, more foreigners are returning to Singapore to work and live. This will drive up demand for residential properties, given that foreigners will need a place to stay while in Singapore. Even if foreigners are looking to rent a place over a shorter- term period of 6 months to 1 year, this will induce increase in demand for residential properties among locals who seek to purchase the properties to rent out as a form of investment. o With higher incomes and positive economic outlook, consumers may have expectations of future increases in the price of residential

2024 PU3 H2 Economics (9570) Prelim Paper 2 Suggested Answers 2 properties. This coupled with a rise in demand for rental housing, due to the increase in number of foreigners in Singapore, will lead to a rise in demand for residential properties. • The supply of residential property in price inelastic, which contributes to a large rise in price when demand increases. Supply of residential property is price inelastic (i.e. PES < 1) due to the length and complexity of the production process, as well as the limited land, capital (machinery) and labour (construction workers) available, which makes it difficult for firms to increase the quantity supplied quickly in response to price changes. • Diagrammatic analysis o The original market equilibrium is at P0 and Q0 where demand (D0) intersects with supply. o The rise in demand for residential properties is represented by a rightward shift of the demand curve from D0 to D1. o This leads to a shortage of residential properties Q0Q2 at the original price, P0. o This will lead to an upward pressure on the market price. As price increases, quantity demanded falls and quantity supplied rises. This continues until a new equilibrium price and quantity is reached at P1 and Q1. o Given that supply is price inelastic, quantity supplied is not able to respond quickly when there is a change in price. As such, a rise in demand leads to large increase in price. Figure 1.1: Rise in demand with inelastic supply R2: Explain how SS factor and PED lead to a large increase in prices of residential property in Singapore • There has been a fall in supply of residential properties in Singapore. Changes in supply can be a result of changes in price of raw material as well as the price and productivity of factors of production. This can be due to any of the following factors: o There has been a rise in costs of raw material for construction , such as sand and metals, due to supply chain disruptions and competing demand from other infrastructure works in Singapore. This can be attributed to permanent changes in global supply chain post - Covid 19, where countries diversify and reduce dependency on single sources of inputs, which result in higher costs, as well as recent wars in Russia-Ukraine and the Middle East, which can disrupt supply. o There has also been a rise in costs of labour , due to a shortage of foreign construction workers, given that those who left Singapore

2024 PU3 H2 Economics (9570) Prelim Paper 2 Suggested Answers 3 earlier during the Covid -19 pandemic may not have returned in the immediate post-Covid period. • The demand of residential property in price inelastic, which contributes to a large rise in price when supply decreases. Demand of residential property is price inelastic (i.e. PED < 1) due the high degree of necessity for the good and a lack of close substitutes, given that people need a place to stay and there are few alternatives of owning a residential property to stay at. • Diagrammatic analysis o The original market equilibrium is at P0 and Q0 where demand intersects with supply (S0). o The fall in supply for residential properties is represented by a leftward shift of the supply curve from S0 to S1. o This leads to a shortage of residential properties Q1Q0 at the original price, P0. o This will lead to an upward pressure on the market price. As price increases, quantity demanded falls and quantity supplied rises. This continues until a new equilibrium price and quantity is reached at P1 and Q1. o Given that demand is price inelastic, quantity demanded is not able to respond quickly in response to a change in price. As such, a fall in supply leads to large increase in price. Figure 1.2: Fall in supply with inelastic demand • (Alternative answer) Small increase in supply, together with a large increase in demand. • Supply has been increasing slowly, due to the slow release of land parcels by the Singapore government, given the land constraints in Singapore. At the same time, foreign construction workers are only slowly starting to return after Covid-19, resulting in a limited increase in labour. • Diagrammatic analysis o Simultaneous shifts showing a large increase in demand and a smaller increase in supply. o While an increase in supply leads to a fall in price, and a much larger increase in demand lead overrides the fall in price and creates a shortage at the original price P0.

2024 PU3 H2 Economics (9570) Prelim Paper 2 Suggested Answers 4 o This will lead to an upward pressure on the market price. As price increases, quantity demanded falls and quantity supplied rises. This continues until a new equilibrium price and quantity is reached at P1 and Q1. Figure 1.3: Market for residential property in Singapore (b) Discuss the effectiveness of the above measures to ensure that the residential property prices remain stable in Singapore. [15] Command word Discuss – at least two measures with evaluation Concept Measures to maintain price stability Co