CJC 2022 A-level CSQ1 ANS

(a) With reference to Fig 1, compare the trend in the real house price index for Singapore with that of Germany and Turkey over the period shown. (3) Any three: • Over the entire period shown, Singapore and Germany real price index shows an increasing trend whereas Turkey real price index shows a falling trend. [1] • Over the entire period shown, the change for Singapore and Germany is more gradual as compared to Turkey having a much sharper change. [1] • From Jul 2017 to Oct 2017, all countries experienced a rise in real house price index and after that period, only Singapore and Germany continued to experience a rise [1] (b) With reference to Extract 1, explain how ‘well-functioning housing markets where the consumer is sovereign’ can affect the supply of houses. (4) • Extract 1 mentions “the right infrastructure, investment and macroeconomic policies towards inclusion can increase the effective demand for affording housing.” This gives the housing market the incentive to increase supply of houses. [1] What are the incentives for suppliers to increase supply of houses? - Extract 1 states that with “adequate infrastructure” which provides a strong regulatory environment for housing and “adequate flow of skilled labour and “housing finance” are all solutions to address housing ownership and thus result in the increase in the supply of houses. [1] - Also in UK, government subsid ies leads to a fall in the cost of production of houses and this will increase the supply of houses. [1] - As in Lombardy, government provides tax incentives to developers will lead to a fall in the cost of production for developers and thus increase the supply of houses. [1] (c) Using price elasticity of demand, explain how ‘an increase in stamp duty’ (Extract 2) is likely to affect total expenditure on private housing. (5) Factor affecting the supply of private housing: Extract 2 mentions that “there is an increase in stamp duty (i.e. a tax on property transactions) that house building firms must pay on the sale of a house.” This increases cost of production and thus reduces the supply of private houses. The supply curve shifts to the left from S to S1. [1] 2022 A Level H1 CSQ 1

Factor affecting the PED of private housing • Using Extract 2, it was mentioned that the 12% change in price of private properties, there is a less than proportionate change in qty demanded. We can see from here that demand is price inelastic. [1] • Impact on total expenditure on private housing • When demand is price inelastic, a fall in supply from S3 to S4 would cause price to increase from P 0 to P 1 and quantity demanded decreases less than proportionately from Q 0 to Q 1. Thus, TE increases to 0P1fQ1. [1] • This is because the gain in TR due to higher price, given by Area A is greater than the loss in TE due to the fall in quantity, given by Area B. Hence total expenditure increases. [1] Well-labelled and well-referenced diagram [1] (d) ‘The benefits to society of residential ownership are greater than the private benefits perceived by the home owner.’ With the use of a diagram, explain how this situation would cause the housing market to fail. (6) Price S1

• Assumption o Assume there are no external costs in home ownership and MEC = 0 hence MSC = MPC. • Divergence between MPB and MSB due to positive externalities [1] o “Home owners may also contribute to society due to a greater sense of belonging. Moreover, it is suggested that higher rates of home ownership could lead to lower neighbourhood crime and higher youth academic achievement.”. Thus, MPB is less than MSB. • Derivation of Qf and Qs [1] o In the free market, consumers will consume houses at Qf where the MPB perceived = MPC. o The socially efficient equilibrium where society’s welfare is maximized is at Qs where the MSC = MSB. • Therefore there is under-consumption by the amount of QfQs due to imperfect information. [1] • Derivation of DWL using trapezium analysis [1] As a result of under-consumption of QfQs, the total benefits>total costs, resulting in net benefits forgone, which is the DWL of abc. Therefore, the government’s economic goal of allocative efficiency is not achieved and thus there is market failure. [1] Well-labelled and well-referenced diagram [1] (e) Comment on the extent to which the information in RESIDENTIAL HOUSING SUPPLY (Extract 1) supports the view that the short run price elasticity of supply of housing is likely to be inelastic. (6) Explain that the information in Extract 1 supports the view that the short-run price elasticity of supply (PES) of housing is inelastic – 4 marks [2 points, 2 marks each] • Firstly, Table 1 shows that the average housebuilding planning process takes 196 days in Latin America and 201 days in Asia before construction can even begin. This suggests that there is a significant

time lag between a rise in housing prices and the ability of developers to increase housing output. As a result, even if higher prices provide an incentive for firms to build more new houses, quantity supplied can only increase after a considerable delay. Therefore, in the short run, the percentage increase in quantity supplied is likely to be less than the percentage increase in price, indicating a supply that is price inelastic. • Secondly, the extract states that housebuilding is a lengthy process involving not only planning but also land purchase, land clearance, construction and administering the sale of houses. These stages further restrict the speed at which housing supply can respond to changes in price in the short run. Consequently, the existing stock of housing cannot be expanded quickly, making supply relatively unresponsive to price changes. Provide a comment: • However, the information only provides partial support for the view. The data refers only to selected cities in Asia and Latin America, so it may not be representative of housing markets in other regions. In countries with more efficient planning systems, the time taken to start construction may be shorter, resulting in a m ore elastic supply response. (f) Discuss the likely impact of a downward trend in the interest rates identified in Extract 2 on the standard of living of people in Singapore. (9) Command Discuss – explain and evaluate with a stand Content Start Point: - Fall in interest rates End Point(s): - SOL of people in SG Context Singapore Approach Intro: Key definitions of concepts. 1 liner overview. Requirement 1: Downtrend in interest rates increase the material SOL of people in SG Requirement 2: Downtrend in interest rates increase the material SOL of people in SG Start Point(s) Fall in interest rates Tool of Analysis AD/AS framework, HDI End Point(s) material and non-material SOL

Evaluation 1: Downtrend in interest rates might not increase the material SOL of people in SG Evaluation 2: Downtrend in interest rates increase the non-material SOL of people in SG Conclusion: Stand, Substantiation, Something Special R1: Positive Impact on mSOL • Fall in interest rates led to fall in the cost of borrowing which will incentivized consumption of big ticket items such as houses. Thus, consumption increases. Also fall in cost of borrowing for housing firms increase the profitability of investments and therefore I rises. • An increase in consumption and investment leads to increase in AD and multiplied increase in RNY from Y0 to Yf via the multiplier effect. Assuming population constant, real GDP per capita increases, This income increase which increases purchasing power of people in Singapore, increases ability to purchase more goods and services and thus increase material SOL. E1: Negative Impact on mSOL