Since govt. impose tax (suppose t) on the housing cost and it is taken from the purchaser. So from the buyer’s perspective, the new purchasing price will be (pe+t). So, it is clear that producers will get price Pe and supply Qe to the market. However, due to rise in consumer price demand will be less than Qe and new equilibrium will be somewhere between Pe and Pe+t. Yet the increment in taxes by the Govt. and all will surely check the long term prices. Apart from that, these favorable taxation framework and cultural parameters additionally supports in forcing the price increments.
Thus, the above estimation cleanly depicts that Melbourne’s house market may look costly on global level as depicted by ratio of house price and income yet is in actual low when seen on basis of square meter due to bigger houses dimension. It is due to this reason costs additionally seem to be more at par when the ratio of price to wages are incorporated on the house size basis. So it is not overpriced on that basis.
Market in Melbourne for housing is consummately overheated which suggests housing cost will be established by the point where demand and supply meet. In figure 1 where the taxes are eliminated and where P signifies the cost and Q represents the demand, the price of the house establishes equilibrium. Let Qe and Pe correspond to demand and equilibrium housing price.
In the above diagram Pt is genuinely the cost collected from the buyers but pt’ is the cost acquired by the owners. The variance is the tax t remunerated to the govt. The effect produced by the kind of tax is that it will shift the supplier curve to the upward direction from S to St which results in decrement in supply. The curve unarguably shows that the tax effect on purchasers genuinely results in decrement in the cost received by the owners and increment in the cost paid by the purchasers. Thus, the load is rationed by both suppliers and buyers in the form of consumer loss and supplier excess as represented below. The total surplus as shown below is the sum of both.