Wednesday, March 7, 2007

Should Govt Increase the Supply of Housing in UK

For several years the UK government has frequently stated its desire to see an increase in the number of houses built. Yet despite its stated desire to increase the stock of housing. The number of houses being built is lagging behind the number of households being created. The effect is to exacerbate the UK housing bubble and make house prices even less affordable.

The advantages of Increasing the Supply of Houses.

1. Demand is Greater than Supply.

The number of households in the UK is estimated to be rising by about 200,000 per year [1]. This is because of

Rising population

Increasing numbers of immigrants (esp. from eastern Europe)

More people living alone; e.g. higher divorce rates, people living longer. However the number of new houses being built is less than 165,000 per year which is one of the lowest figures since 1924 [2]

2. House Price Volatility.

Shortage of Housing makes the housing market more volatile. Because supply cannot respond to changes in demand it means that even a small change in demand causes a proportionally bigger change in price. This is one reason for the rapid increase in house prices in the UK. However if demand were to start falling then it would cause a similarly large fall in price, causing problems of negative equity. If there wasn’t such an acute shortage of housing, the UK housing market would be less volatile.

3. Shortage of Key Public Sector workers.

The shortage of housing is more acute in some areas rather than others. It means that in areas of the South East, especially London many key public sector workers are unable to afford to buy a house. Therefore they prefer to work in areas of the north where housing is more affordable. This adversely effects the London economy and could harm the performance of public services like teaching, police e.t.c in the Long term.

Problems of Increasing House Supply

  1. The Current Planning procedure is notoriously long. A lot of power rests in the hands of local authorities who are able to delay and block housing proposals.
  2. Shortage of Land. In many areas of the country, especially the south East, it is difficult to build new housing without encroaching on green belt land. Thus there is a trade off between economic forces and also environmental forces. To some extent this could be overcome by making better use of brown-belt land.
  3. Time Delays. Because of the problems in planning and building. New housing policies designed now will not have an effect for several years. It is possible that 5 years down the line demand for housing will not be increasing so much.

[1] Supply of housing - BBC Report

[2] Supply of Housing - PDF report

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