2013 NJC H1 Econs Prelims (Ans)

National Junior College Economics Department Preliminary Examination 2013 Answer Booklet Senior High 2 H1 Economics (Syllabus 8819)

1 NJC 2013 8819 / Sep 13 Examiners’ Report for 2013 H1 Economics Prelims Section A: Case Study Question 1 (a) With reference to Table 1 and Extract 1: (i) Compare the change in prices of HDB Resale Residential property and Commercial Shop Space from 2006 to 2011. [2] Similarity: Property prices of both HDB Resale Residential property and Commercial Shop Space show a general increasing trend. [1] Difference: HDB Resale Residential property prices increased at a faster rate as compared to Commercial Shop Space property prices. [1] (ii) Explain how the supply of new flats might help to 'keep a lid on prices' of resale flats. [2] The resale and new flats are substitutes in consumption as both serve the same purpose of providing a shelter/home to the people. [1] When there is an increase in supply of new flats, the quantity demanded of new flats will increase, leading to a fall in the demand for resale flats, thus preventing the price of resale flats from increasing. [1] (b) (i) Describe the trend in Private Residential property prices over the period 2006 to 2011. [2] From 2006 to 2011, private resident ial property prices experienced an overall increase. [1] The private residential property prices dipped from 2007 to 2008 and increased steadily thereafter. [1] (ii) Using economic analysis, account for the trend in Private Residential property prices over the period 2006 to 2011. [4] Residential property prices show an increasing rate of increase.  This is due to the increase in Residential property which could be attributed to the following factors:  Increasing household income with a “buoyant economy”  Availability of housing loans with “low interest rates”  Lifestyle changes  Speculators fuelling increase in investment demand  State and explain clearly a reason for an increase in demand . [2]  Interpret that the phrase “it takes time for supply to cat ch up with demand because of the period required for construction” meant that supply of housing is likely to be price -inelastic (make reference to Extract 2). [1] Thus any increase in demand would like to a sharper increase in prices. [1] (c) With the a id of diagrams, explain how the change in the prices of Residential property could cause changes in the prices of Commercial property. [4]

2 NJC 2013 8819 / Sep 13  There is a positive correlation between the prices of Residential property and Commercial property.  They are substitutes in production (or in competitive supply) as URA land parcels are “earmarked for competing uses such as for commercial, hotel and private residential developments” (Extract 2). Land resource is a common factor of production that can be used for development of commercial or private properties. [1]  Illustrate diagrams showing both markets of Residential and Commercial property. [1]  Explain briefly the diagrams. As demand for residential property increases, the price of residential property increases. The quantity supplied of residential property increases from Q0 to Q1 in Figure (a), in accordance with law of supply. [1]  Thus, at each possible price, there is less land available for construction of commercial property. Thus causes a fall in supply from S 0 to S1 of commercial property, leading to an increase in its prices, as seen in the increase in price from P 0 to P1 in Figure (b). [1] (d) With reference to the data, evaluate the measures to address the increasing propert y prices in Singapore. [8] Introduction  A number of measures had been implemented to curb increasing property prices, which include both demand-side and supply-side measures. Body Elaborate on at least 2 of the following measures with clear links to th e impact on the housing market.  Additional Stamp Duty  curbs speculator demand as it deters potential investors  fall in DD of housing  downward pressure on property prices Evaluation:  This may be effective as speculative demand may be significant in a buoyant housing market. This measure allows the government to curb housing demand without hurting the genuine home buyers.  This may deter FDI from S’pore which would result in negative impact on our macroeconomy. A fall in FDI would result in a fall in in jections to AD, thus via the multiplier effect, result in a more than proportionate fall in nominal National Income, compromising on actual economic growth and cyclical unemployment. Fall in FDI may also compromise on potential economic growth. Price ($) Qty of Residential Property 0 SResidential Q1 Q0 P0 P1 D0 D1 Price ($) Qty of Commercial Property 0 S0 S1 P1 Q1 Q0 DCommercial P0 (a): Market for Residential Property (b): Market for Commercial Property ● ● ● ●

3 NJC 2013 8819 / Sep 13  Housing Loan Limits  difficulty in obtaining housing loans  limits households ability to purchase housing  fall in DD of housing  downward pressure on property prices Evaluation: However it is stated in Extract 3 that there are “low interest rates” and that “(m)any households have amassed cash reserves which can be put down as a deposit for a property” which limits the effectiveness of the above measure in reducing housing demand. Evaluation for DD-side measures:  The mentioned measures do not necessarily target the other core reasons that drive up demand for housing. As mentioned in Extract 3, “healthy economy”, “shallow capital markets” and “lifestyle changes” are some factors causing an increase in demand for housing.  Largely effective though as Supply of housi ng is relatively price -inelastic. Thus any small changes in demand would lead to significant fall in prices (explain clearly with aid of diagram).  Increase supply of HDB flats/ Increase supply of land parcels for Private Residential projects  downward pressure on property prices Evaluation for SS-side measures:  It takes time for housing projects to be completed and thus this is more of a LT measure and should be complemented with cooling demand-side measures.  Effectiveness is also dependent on PED for ho using, which could differ depending on the type of housing. Conclusion/ Evaluate  Candidates are to evaluate on the effectiveness of the above measures.  Both demand-side and supply -side measures are required to address the rising prices as the causes are multi-faceted.  Measures are not likely to be effective as data shows that housing prices are still rising (ref. to Table 1).  Whilst stamp duty and loan limits are effective ST measures, the government needs to consider LT measures to address the fundamental changes in the housing market. L2 4-6 marks  Balanced consideration of both Demand-side and Supply-side measures.  Good scope of discussion with at least 2 measures explained.  Good rigour of elaboration (e.g. inclusion of market equilibrium diagram, application of elasticity concepts etc.)  Reference to case material in explanation (including the consideration of table of trend of housing prices). L1 1-3 marks  Lack of balance in consideration of policies.  Limited scope of discussion with only 1 measure explained. Or mere listing of measures without clear explanation.  Weak rigour of elaboration  No or minimal reference to case material in explanation. E2 2 marks Well-reasoned overall assessment of the measures supported by analysis. E1 1 mark Some attempt at assessing the individual measures in addressing the rising housing prices. (e) Discuss the view that government provision of public housing is necessary. [8] Introduction  Identify the various sources of market failure in the housing market: