The document discusses factors affecting the UK housing market such as demand for housing, supply of housing, and market failures. It analyzes problems in the UK housing market like high house prices and lack of affordable housing. It also evaluates policies to address issues like the inelastic housing supply, such as providing tax incentives to builders, government funding for skills training, and directly funding social housing construction. However, policies face challenges like not resulting in enough affordable housing or causing house prices to fall.

1. AS Micro: The Economics of Housing

2. AS Micro: The Economics of Housing

3. Revision Topics Covered Here
• Factors affecting house prices
• Elasticity of supply of new housing
• Market failures in the housing industry
• Government intervention

4. British housing market problems in the United Kingdom (UK) as of 2014
The most important problems facing the housing market in UK as of 2014
47%
31%
30%
28%
20%
0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0% 50.0%
House prices too high
Size of deposits/cost of mortgages
Lack of social housing
Rents too high
Not enough new homes being built
Share of respondents

7. Forecast for United Kingdom (UK) house prices growth between 2015 and 2019
Growth in house prices in the United Kingdom (UK) from 2015 to 2019
4%
5% 5%
4%
3%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
2015 2016 2017 2018 2019
Housepriceannualchange

8. 150
155
160
165
170
175
180
185
190
195
Q1
2011
Q2
2011
Q3
2011
Q4
2011
Q1
2012
Q2
2012
Q3
2012
Q4
2012
Q1
2013
Q2
2013
Q3
2013
Q4
2013
Q1
2014
Q2
2014
Q3
2014
Q4
2014
HousepriceinthousandGBPNationwide house prices of all types of houses in the United Kingdom
(UK) from 1st quarter 2011 to 4th quarter 2014 (in £000)

9. Costs & Benefits of Rising UK House Prices
Benefits of rising
prices
• Increases wealth of
home owners
• Boosts consumer
confidence
• Stimulates an
expansion of new
house-building
• Increases tax revenues
from stamp duty
• Improves the financial
stability of the banks
Costs of rising prices
• Worsens affordability
for first time buyers
• Increases level of
mortgage debt
• Increases wealth
inequality
• Causes an increase in
demand for and cost of
renting property
• Worsens geographical
mobility of labour
Evaluation Points
Effects of rising
house prices
depends in part on:
1. The scale of the
rise in prices
2. The volatility of
the housing
market
3. The extent to
which home-
buyers over-
extend
themselves
with high
mortgages

10. Costs & Benefits of Rising UK House Prices
Benefits of rising prices
• Increases wealth of
home owners
• Boosts consumer
confidence
• Stimulates an
expansion of new
house-building
• Increases tax revenues
from stamp duty
• Improves the financial
stability of the banks
Costs of rising prices
• Worsens affordability
for first time buyers
• Increases level of
mortgage debt
• Increases wealth
inequality
• Causes an increase in
demand for and cost of
renting property
• Worsens geographical
mobility of labour
Evaluation Points
Effects of rising
house prices
depends in part on:
1. The scale of the
rise in prices
2. The volatility of
the housing
market
3. The extent to
which home-
buyers over-
extend
themselves
with high
mortgages

11. Costs & Benefits of Rising UK House Prices
Benefits of rising prices
• Increases wealth of
home owners
• Boosts consumer
confidence
• Stimulates an
expansion of new
house-building
• Increases tax revenues
from stamp duty
• Improves the financial
stability of the banks
Costs of rising prices
• Worsens affordability
for first time buyers
• Increases level of
mortgage debt
• Increases wealth
inequality
• Causes an increase in
demand for and cost of
renting property
• Worsens geographical
mobility of labour
Evaluation Points
Effects of rising
house prices
depends in part on:
1. The scale of the
rise in prices
2. The volatility of
the housing
market
3. The extent to
which home-
buyers over-
extend
themselves
with high
mortgages

12. Demand and Supply Factors Affecting Price

13. The Demand for Housing
1. Real Incomes: As incomes rise, demand for most housing
increases (strong income elasticity of demand)
2. Mortgage Interest Rates: A rise in mortgage rates increases the
cost of financing a loan on the purchase of a property.
3. Consumer confidence and unemployment
4. Tax & other incentives for buyers e.g. the Help to Buy Scheme
5. Price of Substitutes: For people wanting to buy their own home,
the main alternative is to rent – so a higher cost of renting can
lead to an increased demand for owner-occupied homes
The demand for housing is the quantity of properties homebuyers
are willing and able to buy at a given price in a given time period

14. Housing in the UK since 2010
• Rental costs in England and Wales have risen
15.2 per cent since the last general election,
faster than the rate of inflation
• House prices have risen by 28% to an average
price of £268,000
• Whether renting or buying, affordability is a
huge issue in the UK
• 19% of people need help from their friends or
relatives to pay their rent.

15. The Supply of Housing
Housing supply is the flow of properties available at given price in a
given time period. Supply will be a mix of new and older housing
• The main conditions of supply in the housing market are:
1. Costs of production for construction companies
– Employment costs (wages and employment taxes)
– Costs of purchasing land for housing development
– Costs of purchasing building components and raw materials
– Costs associated with achieving planning consent
2. Number of construction companies and their objectives
3. Extent to which property builders achieve economies of scale
4. Innovation achieved in the house-building industry
5. Taxation and subsidy of new housing developments
6. Government spending on new social housing

16. The Age of the UK Housing Stock
Age of housing/dwellings in England in 2012, by tenure
Distribution of housing stock in England in 2012, by age and tenure
13.2%
17.9%
1.9%
22.4%
14%
8.8%
7%
6.6%
12.3%
8.6%
20.6% 16.1% 32.3%
23.9%
21%
19.4%
12.1%
39.7%
24.4%
20.1%
18.7%
14.1%
14.4%
8.8%
16.6%
19.3% 32.8% 5.2% 8.4% 19.7%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
owner occupied private rented local authority housing
association
all dwellings
Shareofdwellings
post 1990 1981-90 1965-80 1945-64 1919-44 pre 1919

17. Price Elasticity of Supply of Housing
• Reasons for low supply
elasticity
1. Production time frame:
• It can take years for a
project to be completed
• Delays in the housing
planning process
2. Limited spare capacity and
low stock levels:
• Supply is often restricted
by shortages of skilled
labour such as bricklayers,
electricians & plumbers
• Other factor inputs used in
construction such as
cement, bricks may be in
scarce supply
Price
Quantity of Housing
P2
P1
Q1
S1
Q2
D1
D2
The supply of new housing is inelastic in the
short run. Therefore, house prices are
determined mainly by demand factors

18. Housing Market Failure

19. Examples of Market Failure in Housing
Markets fail when they don’t achieve a socially efficient/equitable outcome.
Information Gaps
(e.g. between buyer
and seller)
Empty Housing &
Homelessness
Inequalities of Wealth
(The Widening
Property Divide)
Externalities from
building homes
Labour Immobility
due to high house
prices and rents
Chronic Under-Supply
of Homes creating
excess demand

20. House building in the UK
• 137,000 new dwellings were completed in
2011, which was the lowest since records
began in 1969. But housing completions fell
even lower to 135,00 under the coalition in
2013.
• In 2014, 42,000 affordable homes were built
in England – the lowest number since 2005

21. Generation Rent
• Rent is so expensive that
two in five private
renters (39%) say they
have had to cut back on
heating because of the
cost of rent, while a third
(33%) say that they have
had to cut back on food,
the Generation Rent
campaign claimed in
2014.
• The Joseph Rowntree
Foundation has
predicted that, without
action, rents will rise
twice as fast as inflation,
meaning that by 2040
half of all private renters
(currently 6 million
people ) would be living
in poverty because of the
cost of rent.
Source: Huffington Post, May 2015

22. Generation Rent
• Rent is so expensive that
two in five private
renters (39%) say they
have had to cut back on
heating because of the
cost of rent, while a third
(33%) say that they have
had to cut back on food,
the Generation Rent
campaign claimed in
2014.
• The Joseph Rowntree
Foundation has
predicted that, without
action, rents will rise
twice as fast as inflation,
meaning that by 2040
half of all private renters
(currently 6 million
people ) would be living
in poverty because of the
cost of rent.
Source: Huffington Post, May 2015

23. Interventions in the Housing Market

24. Interventions in the Housing Market
Rent controls Subsidies for
builders
Incentives for
home buyers
Funding of
apprenticeships
Housing
regulations
Social house
building

25. Spending on Housing Benefit
Housing Benefit: United Kingdom (UK) government spending 2002-2013
Government expenditure on Housing Benefit in UK 2002 to 2013 (£bn)
12,636 12,347
13,158
13,928
14,841
15,732
17,103
19,989
21,427
22,820
23,900
0
5000
10000
15000
20000
25000
30000
2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13
HousingBenefitexpenditureinmillionGBP

26. Should Private Sector Rents be Capped?
Discuss the view that a maximum rent should be set for all privately
rented housing in the UK
Qty
R1
Q1
D
Rent
Ceiling
Rent
Q3
S
Q2
• Rent ceiling must be set below
private sector rents to be effective
• It makes rented property more
affordable for some tenants.
• This may help to reduce inequality
and prevents exploitation by
profiteering landlords
• But it creates excess demand for
rented property. Fewer private
landlords see renting as profitable
and the rented housing stock falls
(creating more shortages)
• Illegal markets may develop in the
rented property market.
• Much depends on the severity of a
rent cap – the impact will vary across
regions (e.g. London versus Wales)

27. Should Private Sector Rents be Capped?
Discuss the view that a maximum rent should be set for all privately
rented housing in the UK
Qty
R1
Q1
D
Rent
Ceiling
Rent
Q3
S
Q2
• Rent ceiling must be set below
private sector rents to be effective
• It makes rented property more
affordable for some tenants.
• This may help to reduce inequality
and prevents exploitation by
profiteering landlords
• But it creates excess demand for
rented property. Fewer private
landlords see renting as profitable
and the rented housing stock falls
(creating more shortages)
• Illegal markets may develop in the
rented property market.
• Much depends on the severity of a
rent cap – the impact will vary across
regions (e.g. London versus Wales)

28. Analysing / Evaluating Policies to Raise Housing Supply
Policy options Analysis Evaluation
Building firms given tax
incentives to build new
houses
Increases profitability
from construction –
stimulates investment
• Might be more effective to
tax undeveloped land – i.e.
reduce “land banks”
• Will builders construct
enough affordable homes?
Simplify the housing
planning process
Shortens the time frame
for building therefore
increases price elasticity
of supply
Lax planning might cause a
worsening of the quality of
new housing estates
Loans to building
companies backed by
the government
A subsidy to encourage
housing investment when
the banks are reluctant to
lend
Likely to be an expensive
option (short-term policy) –
doesn’t address long term
issues

29. Analysing / Evaluating Policies to Raise Housing Supply
Policy options Analysis Evaluation
Building firms given tax
incentives to build new
houses
Increases profitability
from construction –
stimulates investment
• Might be more effective to
tax undeveloped land – i.e.
reduce “land banks”
• Will builders construct
enough affordable homes?
Simplify the housing
planning process
Shortens the time frame
for building therefore
increases price elasticity
of supply
Lax planning might cause a
worsening of the quality of
new housing estates
Loans to building
companies backed by
the government
A subsidy to encourage
housing investment when
the banks are reluctant to
lend
Likely to be an expensive
option (short-term policy) –
doesn’t address long term
issues

30. Analysing / Evaluating Policies to Raise Housing Supply
Policy options Analysis Evaluation
Building firms given tax
incentives to build new
houses
Increases profitability
from construction –
stimulates investment
• Might be more effective to
tax undeveloped land – i.e.
reduce “land banks”
• Will builders construct
enough affordable homes?
Simplify the housing
planning process
Shortens the time frame
for building therefore
increases price elasticity
of supply
Lax planning might cause a
worsening of the quality of
new housing estates
Loans to building
companies backed by
the government
A subsidy to encourage
housing investment when
the banks are reluctant to
lend
Likely to be an expensive
option (short-term policy) –
doesn’t address long term
issues

31. Analysing / Evaluating Policies to Raise Housing Supply
Policy options Analysis Evaluation
End the affordable housing
requirement for new build
estates
Builders can charge higher
average prices – creates a
stronger profit motive
Big problem is affordability
– more luxury homes built
won’t help millions of
people hoping to buy
Targeted government
funding of skills training in
the building industry
Expands the human
capital available to the
construction sector
Will take several years to
have a significant effect
(i.e. long time lags)
Government provides direct
funding to build a lot more
social housing / affordable
homes
Fund local councils to
build more affordable
homes
More council houses might
cause average house prices
to fall – negative wealth
effect

32. Analysing / Evaluating Policies to Raise Housing Supply
Policy options Analysis Evaluation
End the affordable housing
requirement for new build
estates
Builders can charge higher
average prices – creates a
stronger profit motive
Big problem is affordability
– more luxury homes built
won’t help millions of
people hoping to buy
Targeted government
funding of skills training in
the building industry
Expands the human
capital available to the
construction sector
Will take several years to
have a significant effect
(i.e. long time lags)
Government provides direct
funding to build a lot more
social housing / affordable
homes
Fund local councils to
build more affordable
homes
More council houses might
cause average house prices
to fall – negative wealth
effect

33. Analysing / Evaluating Policies to Raise Housing Supply
Policy options Analysis Evaluation
End the affordable housing
requirement for new build
estates
Builders can charge higher
average prices – creates a
stronger profit motive
Big problem is affordability
– more luxury homes built
won’t help millions of
people hoping to buy
Targeted government
funding of skills training in
the building industry
Expands the human
capital available to the
construction sector
Will take several years to
have a significant effect
(i.e. long time lags)
Government provides direct
funding to build a lot more
social housing / affordable
homes
Fund local councils to
build more affordable
homes
More council houses might
cause average house prices
to fall – negative wealth
effect

34. AS Micro: The Economics of Housing
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