Analysis of an article discussing South Africa's rental housing market recovery and challenges in the electricity sector - Economics Assignment Help

Assignment Task

QUESTION ONE

Read the extract below and answer the questions that follow:

Good news for South Africa’s rental housing market

TPN Credit Bureau says that South Africa’s residential rental market is back in positive territory, citing data from its first-quarter 2022 Market Strength Index.

TPN Credit Bureau’s Residential Vacancy Survey shows how the South African residential rental market has overcome an almost three-year period of imbalance between demand and supply. The financial services group said that its Market Strength Index is currently 52.9 points, indicating a recovery into a favourable market position, with market equilibrium between demand and supply being reached at 50 points.

An upward trend in the index’s demand strength is likely to assist landlords in recovering from below inflation escalations, it said.

“Although demand for residential rental property has been waning since 2016, the pandemic coupled with the other economic shocks has resulted in a depressed Market Strength Index for 11 consecutive quarters,” said TPN.

The group said that while the lower national vacancy rate has recovered from the double-digit rates in 2021 – 13.31% in the first quarter of 2021 compared to 8.26% in the first quarter of 2021 – it has yet to return to the pre-pandemic level of 7.47?hieved in the first quarter of 2020.

“Despite improved business confidence, slow economic growth, high rates of unemployment and financially constrained households continue to be a challenge in the property sector, slowing down the recovery,” stressed TPN.

Across provinces, the vacancy rate is mixed with the continued growth in the supply of rental housing in some provinces, limiting a return to pre-pandemic vacancy levels:

Gauteng

Home to close to half of all tenants in South Africa, Gauteng has had its vacancy rate recover considerably to slightly above the national average vacancy rate of 8.26% at 8.69%.

“The province’s slower rate of recovery is being exacerbated by a higher rate of office buildings being converted into rental housing accommodation as commercial real estate remains under pressure,” noted TPN.

While recovery may be slow, Gauteng has seen negative rental escalations mitigated and is back in positive territory.

Western Cape

Demand for properties in the Western Cape continues on a positive trajectory in its return to low vacancy levels, last seen in 2016 and 2017.

In the second quarter of 2021, the vacancy rate of the Western Cape peaked at 14.38%, and now is at 2.9%, said TPN.

KwaZulu-Natal

KwaZulu-Natal has had a different first quarter of 2022 compared to the other provinces going from 9.34% in the final quarter of 2021 to 13.26%. “This is likely the result of the continued impact of the July 2021 civil unrest and riots, which resulted in higher unemployment and the closure of some businesses in the province,” said TPN.

Eastern Cape

The Eastern Cape has maintained the lowest average vacancy rate of all provinces at 6.3% – more than 2% lower than the national average for the same period.

According to TPN, this lower vacancy rate is partially attributed to the province’s reduced number of rental properties.

TPN said that after two years of a strained market, rapidly increasing costs in the form of rate, maintenance and utilities, landlords would be looking to above inflation escalations to recover. As a result, high demand areas will achieve above-average rental growth. At the same time, other pockets of the market will continue to see high levels of vacancies because of supply being too high or a lack of demand, linked to unusual economic stressors.

1.1 With the aid of the given diagram, explain the “good news” for the rental market being referred to in the article.

1.2 Identify and discuss the type of price control that may be implemented to control massive rent increases.

1.3 Identify, giving reasons, the type of market structure applicable to the rental market. Comment on the efficiency of such a market structure.

 

QUESTION TWO

Read the extract below and answer the questions that follow:

South Africa’s economic growth affected by mismatch of electricity supply and demand

South Africa’s electricity sector has faced a series of challenges over the last two decades. It started with inadequate grid infrastructure to provide electricity to the majority of the South African population in the 1990s. In 1994, only 36% of total households were electrified; 50% of the urban population and 12% of the rural population.

Particularly in the middle of the 2000s, the national utility, Eskom, ran into liquidity and profitability problems. It received frequent government bailouts. The 2022 national budget allocated R21.9 billion (about US$1.5 billion) to Eskom.

Meanwhile Eskom’s ageing electricity generation plants have deteriorated, resulting in frequent breakdowns. Since 2007/2008, the utility has been unable to supply electricity to meet aggregate demand. It has implemented rolling power cuts. These are systematic, temporary power outages that help balance the supply and demand of electricity in the market to avoid national blackouts. Electricity tariffs have risen by 14.73% year-on-year on average from 2008/09 to 2018/19. In recent years, particularly since 2008/09, the instability in the electricity supply, combined with the rising tariffs, has had a dire economic impact. It has become a barrier to income generation, economic growth and development. South African businesses have suffered significant losses. Planned power cuts are expected to reduce 2021 GDP growth by three percentage points – and cost the country 350,000 potential jobs.

The political and academic debates about electricity and economic growth have tended to focus on the impact of either generation capacity or demand and consumption. We wanted instead to explore the impact on economic growth of a mismatch of electricity supply and demand. We initially thought that any mismatch – a shortage or a surplus – would probably be bad for economic growth.

Our study covered the South African economy from 1985 to 2019. We found that a rising surplus of electricity enhanced economic growth. And increasing economic growth contributed to the rise in the electricity surplus, by making resources available to increase generating capacity.

The mismatch of electricity supply and demand is conducive for growth only when supply exceeds demand. Reduced demand, for example through managed power cuts, and undermines the potential for the electricity market to make a positive impact on the South African economy in the long run. These results were not entirely what we expected.

Policy usually aims simply to expand power generation. Instead, our analysis suggests it will need to ensure that electricity demand can rise enough to facilitate economic growth while ensuring supply is always higher than this rising demand.

Analysing the variables

We used data on electricity supply and consumption, trade, fixed capital accumulation, gross domestic product and employment from a few sources. They include the World Bank, Statistics South Africa and the Council for Scientific and Industrial Research.

We analysed the data using a technique that examines long-run relationships among the variables over a selected time period.

In economics, a market is unbalanced when there is a difference between the supply of and demand for an item. In the South African electricity market, supply and demand were in a relative alignment - although not in full equilibrium - until the middle of the 1990s.

The first power shortage appeared in the second half of the 1990s. It may have been due to the mass electrification programme of 1991. Electricity access rose from below 50% in the beginning of 1990s to more than 80% in the middle of 2000s. Meanwhile the economy was in recovery after the lifting of sanctions and the coming of democracy. Households and the production sectors of the economy steeply increased demand for electricity.

In 1997, Eskom requested additional generation capacity to be able to cover the anticipated increases in demand. But capacity did not increase at the expected rate. As a result, Eskom did not meet electricity consumption from 2002 to 2008, and onward. The electricity sector continued over the study period to be haphazard, with mismatches of demand and supply.

 Overall, when there was a surplus of electricity, it enhanced economic growth in South Africa. And increasing economic growth contributed to the rise in the electricity surplus. But when demand was greater than supply, the mismatch was not conducive to economic growth. The impacts of positive and negative periods of mismatch are not the same.

A growing economy creates room for increasing electricity generating capacity. This may be through higher tax revenue, consumers’ ability to afford electricity, a better financial position for the national utility, and better credit rankings which attract investment in the energy sector. Thus, potentially, space for a more significant surplus can be created. And when electricity supply exceeds electricity consumption, it enhances economic growth because there’s less risk of power interruptions. When the consumption of electricity rises, it must be met with a sufficiently rising supply for the market to maintain an increasing surplus. At the same time, demand must be increased at a conducive level for economic growth.

Policy goals

Economic and energy policymakers are responsible for increasing both demand for and supply of electricity in such a way that there is always a surplus of energy. This encourages economic growth. The policy goal, therefore, is more complicated than only an increase in generation capacity. It also has to encourage energy efficiency, promote economic opportunities and meet environmental commitments.

Generation capacity needs to become more adaptable and flexible. A potential way to achieve this is through a more diverse supply mix, with a greater role for renewable energy sources.

Questions: 2.1 Electricity is considered an input for a number of firms. Critically evaluate the impact of electricity shortages on firms and use the given diagram to explain the impact on the economy.

2.2 Taking the article into consideration, identify and explain the type of inflation that may result. Use the relevant graph to motivate your answer:

 

2.3 Highlight the various stages of the business cycle and indicate where the economy is currently most likely to be.

 

QUESTION THREE

Australia has been facing high levels of inflation and this has prompted policymakers to advocate for an increase in interest rates. Critically evaluate this decision.

 

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