market failure in housing
The housing sector does not always operate in an optimum way. Indeed there are many economists who believe that the housing sector is a good example of numerous market failures - we examine this in this section.
Recap: Market failure is the failure of individual markets to operate efficiently leading to a misallocation of resources. When market failure occurs, there is allocative inefficiency i.e. it is possible to make someone better off without making someone else worse off
Possible causes of market failure in the housing sector
Measuring the true scale of homelessness in the United Kingdom is extremely difficult. The Shelter web site provides some evidence on how many people are classified as homeless.
Homelessness is the most acute indicator of housing shortage. In 1999 a total of 166,760 households were recognised as homeless by local authorities in England. This represents over 400,000 people.
This figure is only the tip of the iceberg. It does not include most of the 41,000 people who are living in hostels and squats, or the 78,000 couples or lone parents sharing accommodation, as they are unable to afford to set up a home on their own.
People from minority ethnic groups are over represented among homeless households. In 1998, 59 per cent of households accepted as homeless by local authorities in inner London were from ethnic minorities.
The Government estimates that at June 1999 around 1,600 people were sleeping on the street on any one night. In 1999, Shelterline, received 38,000 calls from single homeless people. Most single people have no priority under the current homelessness legislation.
Unfit housing also contributes to social exclusion and growing levels of crime and vandalism
Housing is a scarce resource - yet in the United Kingdom the Government calculates that over 770,000 homes are empty at a time when total housing demand is exceeding available supply in some parts of the country. This is clearly an inefficient use of the available housing stock. This paradox is partly explained by the fact that demand for certain types of property in some areas is very low - making it unprofitable for people to rent these properties out or attempt to sell them on the open market
For every homeless person in England, there are seven empty homes
Severe shortages of good quality and affordable rented properties
The UK housing sector is short of good quality and affordable rented properties. This creates problems for people for whom home ownership is not a realistic option but who need to move into new areas to find work.
Until recently the shortage of rented properties has led to a sharp rise in rent levels.
Between 1988/89 and 1998/99 the average weekly
rent for council tenants more than doubled from £19.00 to £42.80
From 1989 to 1999 the average weekly rent for housing association tenants more than doubled from £24.97 to £53.80Between 1990 to 1998/99, the average weekly rent in the private rented sector increased by nearly 85 per cent from £45 to £83
Poor Quality Housing - Inequality and Negative Externalities
The homelessness figures understate the even bigger problem - millions of people live in (mainly social) housing in poor condition. The Government White Paper on Housing published in December 2000 stated that the private rented sector suffered from a historical lack of investment. In local authority housing, the Government identified a £10 billion backlog of overdue renovation work particularly in social estates many of which were built to poor standard of design and construction.
The poor quality of much of the UK housing stock inevitably has an effect on the standard of living and quality of life of many thousands of people. There is growing evidence that poor housing contributes to a decline in average life expectancy and increased incidence of illness. This imposes extra costs on the National Health Service and Social Services. To these external costs we can add the impact of poor housing conditions on the educational attainment level of hundreds of thousands of school children.
The government pays out huge sums each year to people in housing benefit and other related forms of social security. In part this is because of the sharp rise in average rent levels in both private and local authority rented housing - rents which thousands of people on benefits cannot afford to pay.
Dependency on housing benefit (which is means tested) creates disincentives for people to actively look for work. Poverty is a major barrier to obtaining good quality housing. The most economically and socially disadvantaged people in society tend to live in the worst housing.
Market Failure and Inefficiency in Housing Transactions
The system of home buying and selling in England and Wales is one of the slowest in Europe, it causes misery and frustration for many home buyers and sellers, and it leads to many transactions falling through after an offer has been made.
Previous research has shown that it takes around eight weeks to get from offer acceptance to exchange of contracts, that 40 per cent of both buyers and sellers are dissatisfied with the process, and that 28 per cent of offers fail after acceptance.
Geographical Immobility of Labour
There are good reasons for arguing that the current UK housing system impedes the geographical mobility of labour and therefore leads to a reduction in overall economic efficiency
(i) Large regional differences in house prices
(ii) The shortage of affordable rented properties
(iii) The time delays and high costs involved in buying and selling properties
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