AS Micro: Housing Market Failure

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Market failures mean that the market-driven outcome diverges from a socially optimal outcome

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AS Micro: Housing Market Failure

  1. 1. Housing Market Failure and UK Government Housing Policy Unit 1 AS Micro Economics
  2. 2. Housing in the UK • 26.4m: The number of households in the UK in 2012 – predicted to rise to 28m by 2016 • In 2005-06 home ownership peaked at 71% of dwellings (figures for England only). It declined to 65% in 2011-2012 and is expected to fall further. • The number of privately rented homes between 2005-06 and 2011-12 went up from 2.4m to 3.8m • 449,000: The number of households with six or more occupants • The most common household in England - 7.9m properties – is two people living in a home. Source: www.theguardian.com/money/2013/aug/17/statistics-behind-uk-housing-market
  3. 3. Follow Geoff Riley on Twitter @tutor2u_econ For the AS micro exam, follow the hash tag #econ1 www.tutor2u.net for extra revision resources
  4. 4. What is market failure? • Market failures mean that the market-driven outcome diverges from a socially optimal outcome
  5. 5. What is market failure? • Market failures mean that the market-driven outcome diverges from a socially optimal outcome The importance of housing “Housing is crucial for our social mobility, health and wellbeing – with quality and choice having an impact on social mobility and wellbeing from an early age, and our homes accounting for about half of all household wealth.” Source: UK Government Report, November 2011
  6. 6. Optimal markets … require • Competition between suppliers • Perfect information among agents (buyers and sellers) • Markets that fully value externalities into the pricing of goods and services • No missing markets e.g. non-provision of public goods and under provision of merit goods • An equitable final distribution of scarce resources
  7. 7. What are some of the root causes of housing market failure?
  8. 8. Chronic imbalance between housing demand and supply • UK Housing Market Review (2013) (link) • “The gap between housing supply and projected new household formation is still a wide one. New output in England has stayed a little above or below the 100,000 mark for five years, whereas even the slightly lower official projections up to 2021 now expect there to be 220,000 new households each year. The massive mismatch between household growth and housing output suggests that housing shortages will increasingly prevent people from forming households and lead to greater sharing and overcrowding.”
  9. 9. Empty housing – a waste of scarce resources • Why are there empty homes when there is huge excess demand? • Just over 635,000 homes in England are empty, and around 216,000 of those have been empty for over 6 months (Feb 2014) • Is empty housing a cause of allocative inefficiency? • What can be done?
  10. 10. Empty housing – negative externalities • A neglected empty home can quickly start to cause problems for neighbours, depressing the value of adjacent properties and attracting nuisance, squatting and criminal activity. • This creates additional burdens on local authorities and the emergency services.
  11. 11. Chronic housing shortages • Shortages of affordable homes have been a major problem for years • Too many poor quality homes also • Main house builders possess enough land with at least outline planning permission to build hundreds of thousands of homes • Shortages affect the mobility of workers in the labour market
  12. 12. Housing shortages • UK house prices could quadruple to an average of over £900,000 in twenty years' time and make home ownership impossible for millions if the Government does not take action to tackle the housing shortage, a leading charity has warned. • Shelter called on the Government to make reforms aimed at increasing the amount of new homes being built to 250,000 a year by 2021 in order keep up with demand, as it said currently there was a shortage of 100,000 houses a year in the UK. Source: www.shelter.org.uk
  13. 13. Housing shortage (Shelter report) 250,000 homes minimum projected to be needed in the coming years – in part due to population growth
  14. 14. Homelessness – outsiders in the housing sector • Homelessness is estimated to cost between £700 million and £1 billion each year in extra housing costs and wider public costs on e.g. benefits, health, crime and education • More than 80,000 young people experience homelessness each year in the UK
  15. 15. Imperfect information in housing • Asymmetric information is a key feature of the housing market • Normally sellers know more than buyers • There are costs involved in securing accurate information • Risk of mis-selling by estate agents and distortion of the market
  16. 16. Building new homes – the external costs issue • There is a chronic housing shortage in the UK • Economic and social trends suggest that we will need over 3 million new homes in the next twenty years • House building involves private costs and benefits • There are also externalities associated with new housing developments – External costs (negative externalities) – External benefits (positive externalities) • Poor decisions on where to build new homes can create market failures
  17. 17. Population growth and rising demand for housing in the UK
  18. 18. Are we building enough homes? "Britain, a wealthy & resourceful country with 90% of its land still undeveloped, cannot...properly house its people.“ Guardian, May 2014
  19. 19. Rented housing costs in the UK
  20. 20. Private and external costs & benefits of house building
  21. 21. Externalities • Externalities are third party (spill-over) effects arising from production and consumption of goods and services for which no appropriate compensation is paid • Externalities cause market failure if the price mechanism does not take account of the social costs and benefits of production and consumption • Externalities can be positive and/or negative
  22. 22. Private and external costs of building new homes Private costs External costs Land purchase Construction costs i.e. Wages Raw materials Meeting costs of building regulations
  23. 23. Private and external costs of building new homes Private costs External costs Land purchase Noise Construction costs Air pollution i.e. Wages Lost natural habitat Raw materials Increased congestion Meeting costs of building regulations
  24. 24. Private and external costs of building new homes Private costs External costs Land purchase Noise Construction costs Air pollution i.e. Wages Lost natural habitat Raw materials Increased congestion Meeting costs of building regulations Reminder: Measuring housing externalities is a complicated task – not everything can be accurately measured and valued
  25. 25. Negative externalities from house building – social cost > private cost Costs and Benefits Output of new housing Marginal private and social benefits Marginal private cost (MPC) S T Marginal social cost (MSC) U V W Y Z Loss of Social Welfare due to market failure
  26. 26. Private and external benefits of new housing projects Private benefits External benefits Building firms • Revenues /profits Home buyers • Utility from purchasing / living Employment • Jobs on construction projects
  27. 27. Private and external benefits of new housing projects Private benefits External benefits Building firms Better public health • Revenues /profits Improved mobility Home buyers Less crime • Utility from purchasing / living Lower environmental costs from new builds Employment Benefits for local businesses • Jobs on construction projects Impact on value of nearby housing
  28. 28. New housing can also create positive externalities! Costs and Benefits Output Marginal private benefit Marginal private cost and social cost A B Marginal social benefit C D Loss of Social Welfare due to market failure
  29. 29. If there is market failure – there is a case for some government intervention • Taxation – for consumer and suppliers – Changes in council tax and stamp duty – Taxation of building materials / – Inheritance tax – Corporation tax for construction companies – Tax on undeveloped land (land banks) • Direct intervention e.g. maximum rents • Regulation – Health and safety legislation & housing planning controls. • Subsidies e.g. for new affordable housing
  30. 30. Increasing the supply of new homes in the UK economy • Making available surplus public sector land e.g. Former air bases, council buildings • Loan guarantees for housing developers to encourage the building of more social and privately rented housing • Measures to encourage self-build homes • Reducing planning regulations on house builders to lower costs of projects • Creation of new garden cities e.g. Close to Ebbsfleet
  31. 31. Is self build an effective option in the UK in the long run?
  32. 32. Judging government intervention • Why is the intervention being proposed? • Will it work? Will it be effective in meeting specific objectives or goals of policy • On what assumptions is policy being based? • What are the alternatives to a particular policy? • Are there any negative consequences arising from a particular policy being introduced? • Beware of the law of unintended consequences! • There is always the risk of government failure
  33. 33. Current aims of UK housing policy • Sustainable housing – Everyone should have the opportunity of a decent home at a price they can afford, in a place in which they want to live and work • Raising home ownership by boosting housing supply and making it more affordable • Improve the supply and quality of social housing • Improve the supply-side performance of the UK construction industry to increase productivity • Making the most of brown-field land as a source of land for new housing developments • Meeting the long term housing needs of a growing and ageing population – more smaller homes? • Strategy to reduce homelessness in towns and cities
  34. 34. Follow Geoff Riley on Twitter @tutor2u_econ For the AS micro exam, follow the hash tag #econ1 www.tutor2u.net for extra revision resources

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