Micro and Macro Aspects of increased house-building | Synoptic Paper 3

In this synoptic economics revision video we look at some of the micro and macroeconomic effects of a substantial increase in new housebuilding in the UK.

VIDEO SUMMARY

The UK faces a shortage of housing, with demand exceeding supply. Increasing house building can have both micro and macro effects. On a micro level, it can benefit construction companies through higher revenues and profits, while consumers may experience improved housing affordability. Macro effects include stimulating economic growth, creating jobs, and enhancing labor mobility. However, challenges arise, such as shortages of skilled workers leading to wage inflation and delays in project completion. Additionally, the environmental impact, trade deficits, and regional disparities must be considered. Overall, increasing house building can address housing shortages and contribute to economic development, but careful management is necessary to mitigate potential drawbacks.

According to the Local Government Association, “Quite apart from the social benefits that accrue from a well housed population, the house building industry contributes £19bn a year to the UK economy, supports 600,000 jobs and has a predominantly domestic supply chain.”

The latest house building statistics show that in the year ending March 2022 there were 204,530 dwellings completed in the UK. According to one estimate commissioned by the National Housing Federation, around 340,000 new homes need to be supplied in England each year, of which 145,000 should be affordable.

Micro effects of a rise in new house-building in the UK

Rise in revenues and profits for construction companies and supply-chain businesses: Increased output is likely to lead to a rise in revenues (AR x Q) and profits (P>AC). This assumes that higher building costs don’t impact too much on profits.

Improved housing affordability: If new housing supply grows faster than demand and a rising % of new properties are affordable homes, then this should help to bring down average prices and cause a rise in effective demand for home-buyers many of whom have been priced out of the market in recent years.

Macro effects of a rise in new house-building in the UK

Economic growth: Increased housebuilding stimulates GDP growth because it creates demand for labour, materials, and services, which in turn can lead to a positive accelerator effect in the construction industry. The sector contributes nearly £20bn a year.

Reduced unemployment: Not only will extra house-building generate new jobs such as building workers, engineers and architects, but it will also help to improve geographical mobility of labour which is a cause of long-term structural unemployment.

Micro and macro downsides of a rise in new house-building

• (Micro) Skills Shortages: If the supply of skilled workers does not keep up with the demand, it can lead to wage inflation, increased construction costs, and potential delays in project completion.
• (Micro) Environmental Impact: Including negative environmental consequences, such as increased carbon emissions, habitat destruction, noise and increased traffic congestion
• (Macro): Rise in the trade deficit: For example if there is a sharp increase in imports of construction materials and equipment
• (Macro) Regional disparities: A significant rise in housebuilding may not be evenly distributed across regions, leading to regional disparities.