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

1. Housing Market Failure and UK
Government Housing Policy
Unit 1 AS Micro
Economics

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. Follow Geoff Riley on Twitter
@tutor2u_econ
For the AS micro exam, follow the
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4. What is market failure?
• Market failures mean that the market-driven
outcome diverges from a socially optimal
outcome

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. 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. What are some of the root causes
of housing market failure?

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. 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. 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. 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. 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. Housing shortage (Shelter report)
250,000 homes minimum projected to be needed in the
coming years – in part due to population growth

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. 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. 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. Population growth and rising
demand for housing in the UK

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. Rented housing costs in the UK

20. Private and external costs &
benefits of house building

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. 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. 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. 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. 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. 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. 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. 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. 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. 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. Is self build an effective option in
the UK in the long run?

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. 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. Follow Geoff Riley on Twitter
@tutor2u_econ
For the AS micro exam, follow the
hash tag #econ1
www.tutor2u.net for extra revision
resources