The Housing Market

1. The Housing Market

2. Content • Housing market • Regional differences in house prices • Changes in pattern of housing tenure • Market failure and government intervention • Housing market and the national economy

3. Housing Market • The UK housing market covers accommodation in the following sectors: • Owner-occupied • Private rented • Housing association • Local authority housing

4. Regional Differences In House Prices • In the UK there are regional differences in house prices • The most expensive places to buy houses are London and the south east • The least expensive are the north, northern island, Scotland and Wales

5. Impact of Regional Differences On The Economy • These differences impact the economy in two ways: • Impact on labour mobility • Differences mean that labour is less geographically mobile – people from places with lower house prices cant afford to move to the south east / London • People from the South east / London are • Macroeconomic impacts • Greater house price inflation increases consumers wealth which increases the level of consumer borrowing increasing consumer demand leading to an increase in price levels and regional inflation

6. Reasons for Regional Differences • The following factors cause regional differences: • Differences in regional incomes – these are generally higher in the South East due to differences in regional economic growth and GDP • Differences in regional unemployment – places where house prices are cheaper e.g. Wales, Northern England tend to have higher rates of unemployment than places where house prices are more expensive, this is due to a decline in primary and secondary industries e.g. coal mining, manufacturing

7. Reasons for Regional Differences • Movement of population- there is a tendency for people to migrate from the North of England to the South East and London • Regional variations in the cost of land and its availability for new housing and in the wages of construction workers

8. Government Intervention to Decrease Regional Differences • Regional differences in house prices are a major problem in the UK economy as they cause geographical immobility to labour • The government can use the following strategies to decrease the regional differences: • Demand side policies: • Regional policies • Regional reductions in stamp duty • Supply side policies • More relaxed planning controls where there is high demand for housing • New towns etc to improve supply of housing • Changes to taxation for homebuilders in different regions

9. Changes in Pattern of Housing Tenure • There has been a trend towards increasing owner occupation in the UK economy • This has grown from 56% in 1980 to 71% in 2000 • Corresponding to this increase in owner occupancy the rented sector has been in decline • The largest decline in the rented sector has been in the social renting sector where people rent from housing associations and local authorities

10. Factors behind the change in tenure • Government incentives – the conservative government of the 1980s gave local authority residents the right to buy their houses at a discounted rate increasing house ownership • A rise in living standards has been more people are able to afford to buy their own houses • Shortages of affordable and good quality rented accommodation • Deregulation of mortgage finance – mortgages are now available from many different providers for all types of buyers meaning it is easier to buy your own home

11. Market failure and government intervention • Governments intervene in the housing market to try and allocate resources more effectively and make the markets work more efficiently • The government have intervened in the UK market in the following ways: • Through legislation • Home buy scheme • Stamp duty • Taxation and benefits scheme • MIRAS – Mortgage interest relief • Government subsidies • Interest rates

12. Government Intervention In Housing Market • Through legislation – this has helped deregulate mortgages (1983 banking act, 1986 building societies act) and to increase ownership of local authority housing by tenants (1980 housing act) • Home Buy Scheme – This allows social tenants to borrow up to 25% of the value of their home through an interest free loan

13. Government Intervention In The Housing • Stamp duty – The government recently increased stamp duty to 3% for properties over £250,000 • Properties from £60,000 - £250,000 pay 1% • Properties under £60,000 pay 0% • The increase in stamp duty was aimed to decrease the demand for properties over £250,000 especially in property hotspots such as London

14. Government Intervention In The Housing • Taxation and benefits systems – The government provides means tested housing benefit for people in low income households, this is mainly used for rental accommodation • MIRAS this was mortgage interest relief at source and provided tax relief on the interest people paid on their mortgages, this scheme was not effective and was scrapped in 2000

15. Government Intervention In The Housing Market • Subsidies – the government can provide subsidies for housing developments to increase the supply of housing in areas where there is high demand. By increasing supply they hope to decrease the price of houses • Interest rates – these are set by the Bank of England, When interest rates increase they make the cost of mortgages higher and should therefore reduce demand for housing although this has not been the case in recent years

16. House market inflation • Since 2000 the housing market in the UK has experienced growth of up to 20% a year in some regions • The causes of such increases have included: • Low unemployment • Increase in real incomes • Low rates of interest for mortgages • Strong speculative demand for housing – people are expecting prices to grow even more • Lack of supply of new housing • Social housing is limited in supply • Land has increased in price • Wages in construction sector have increased

17. House price inflation • The combination of these factors has lead to a shift in the supply and demand curves pushing up the equilibrium price of housing

18. Impact of a rise in house prices on the macro economy • Consumption – as house prices have increased consumption has increased due to wealth effects and equity withdrawal • This increase in consumption can lead to greater consumption of imports increasing the deficit on the balance of payments • As the price of houses increases it leads to positive effects on the construction industry which can create economic growth especially if there is a large multiplier effect • As house prices increase and more people move house then complimentary industries e.g. furniture shops, estate agents also boom

19. Summary • There are regional differences in the house market in the UK which result in the geographical immobility of labour • More people now own their own homes in the UK and less people rent • The government intervenes in the housing market in a number of ways including by changing stamp duty, providing subsidies and providing housing benefits • Rising house prices lead to an increase in the level of consumption in the economy which can increase AD