Housing in a Free Market Economy - Essay Example

?Topic: Why should the intervene in housing in a free market economy? How far do current policies for housing finance reflect these justifications? Use supply and demand diagrams and the material taught on the course in welfare economics to support your answer. Identify the practical considerations for the design of a housing organisation’s business plan. Introduction With the end of the housing blast of the past decade, the UK government under Gordon Brown wants to energise the housing sector of the economy. The government’s interference in housing and its authenticity in playing a role in the housing market through its policy initiatives is being seen doubtfully by experts as they perceive the ups and downs of the market functioning a part of the business cycle of regular intervals of boom and bust OR the government’s desire to meddle in the housing affairs just shows the obsession of the people to own a home of their own OR the government has started realising the importance of hosing market in the overall economy of the country, needs o be analysed (The Telegraph, 5 June 2008). State Intervention in Housing The government can intervene in housing sector by planning its role through various choices and taking certain measures. It can initiate a national homes saving scheme by facilitating first-time home buyers to use their tax-free 5-years period deposits. It can allow parental help by making the contribution in the housing of their children tax-free. It can increase the stamp duty to a certain limit to minimise the impact to new buyers. The government can declare a stamp duty ‘holiday’ for a stipulated time to boost the housing market. It can loosen the regulatory grip so that home building activity becomes hyper. It can be lax in insisting on Home Information Packs, which are offered and paid by the sellers. The government can limit the number of ‘affordable homes’ on the upcoming housing locations to boost housing growth as house making is less profitable for making affordable homes (The Telegraph, 5 June 2008). Competition is very important in housing market to disrupt the rent-seeking tendencies by powerful builders. Rent seeking, laissez-faire and state intervention not only kills competition between the market forces but comes in the way of innovation. Government level intervention can bring about greater transparency in the housing transactions (Hooper, 2009). Arguments in Favour of Government Intervention in Housing Sloman and Sutcliffe (2004) state a number of reasons inviting government intervention in business. To fulfil the aim of social efficiency, which is attained when marginal benefits become equal to marginal costs from production or consumption activity, government can interfere in the specific business market. Response of market to changes in supply and demand may be slow, which can impair the level of equilibrium and cause instability. A free market does not consider the needs of less-affordable people and therefore, the production of merit goods could be insufficient. Market irregularities can be corrected through taxes and subsidies. Taxes can be increased to equal the size of the marginal external cost and offering subsidy equal to the marginal external advantage. The government can regulate the market behaviour by making certain laws to be abided by for the benefit of common man. These are some of the steps government can take to interfere in the market for any business activity. The current discussion on government role in housing market has gained momentum because of the global financial crisis, which has drawn the attention of policy makers in the UK government. It wants to rescue the housing and banking sector, as housing and finance are inter-related sectors; without getting loans sanctioned by the financial organisations, the home buyers cannot purchase houses and the housing industry cannot attain growth. On its part, the British government through the Bank of England made $352 billion available via the Special Liquidity Scheme to enhance the liquidity of the financial institutions. It helped banks in swapping their top-rated mortgage-supported and other securities for UK treasury bills (Nanto, 2009, pp. 66-67). One such plan was presented by the Labour Party on November 24, 2008 to the Parliament to invigorate the nation’s slowing economy by providing an array of tax reductions and government spending projects to the tune of 20 billion pounds (about $30 billion). The stimulus package included a 2.5% reduction in the value added tax (VAT), or sales tax for 13 months, a delay in corporate tax increases, and government sureties for loans to small and midsize business. Significant measure planned by the government is to spend 4.5 billion pounds on public works that also includes public housing among others. Some measures point out that the extra spending needed by the plan will further increase government budget deficit in 2009 to a figure equal to 8% of GDP. To finance the plan, the government would impose income taxes on those making more than 150,000 pounds (about $225,000) from 40% to 45% from April 2011. Besides, the British plan would increase the National Insurance donations for all but the lowest bracket employees (Nanto, 2009, pp. 66-67). Regarding policy on housing, it is normally discussed in economic context as a kind of market. Theoretically, markets move on to realise effective distribution via complicated process of equality in supply and demand, as shown in figure 1 below. This figure is based on DiPasquale-Wheaton model 1992, 1996, showing a state of equilibrium in the housing market. Here S stands for the level of stock, R for rent, P for price, and C for level of new construction. This model of the housing market indicates dynamic growth in housing demand, moving the demand curve to the right as an outcome of increase in demand. The government support to the private building activity has encouraged construction of ore houses, C^, which leads to the equilibrium amounts of stock S, the rent R, and the price P (Leung & Wang 2007, pp. 135-137). A number of variables such as competition, information, the presence of a number of suppliers and buyers are required to reach equilibrium. In housing, this theory is not as fully applicable as in other business sectors because of below given factors (Spicker, 2011). Market ending. Housing supply and finance are led by a few leading players. The scarcity of space. Area is severely crucial in the housing market; it hinders the flow of information and free competition. Externalities. Housing both impresses the environment and is impressed by it. Credit distribution. The housing market functions primarily on housing finance; borrowers take their decisions on predictions of future premium, which is very dissimilar to other market behaviours like food market. Uncertainty. Like future, the housing market is not certain. Control mechanism and government interference help in the creation of faith in market behaviour. Market volatility. Prices are controlled by a selected part of the market where housing transactions are taking place at all times. The issue of meeting need. If profitability is the only criterion, hosing needs would not be met, increasing the number of people without their own homes. Government Policy Initiatives To fulfil the housing needs of the people of England, the government issued the new housing strategy in November 2011 named, ‘Laying the Foundations for England: A Housing Strategy for England,’ to reinvigorate the housing market and offer selection and value for all tenants. The housing strategy outlines plans to better social housing by investing ?4.5 billion in new affordable housing. The government wants to boost housing associations and for-profit builders to enter the affordable homes market, for constructing 80,000 new homes for affordable rent and home ownership (Inside Government, 13th March 2012). Affordable housing can help the government in bridging the quantity gap, as shown in figure 2j. Further the government can heighten the builders’ morale by providing “affordable housing” and in return reducing certain stamp duty fees and discounting taxes, as shown below in figure 2k: ‘Affordable housing: price subsidy’ (Leung & Wang 2007). Localism Act & Housing Revenue Account The recent passing of the Localism Act (November 2011) will promote decision making on housing more at local level. There are new plans in the offing in the housing strategy to shift the present Housing Revenue Account (HRA) subsidy system with a passing self-financing model, permitting local councils to keep rental income from the 1.7 million homes owned by them. Councils will be free to take a flexible approach to better look after their housing stock by implementing changes as per local needs. This includes fixing parameters for social housing to manage different types of tenancy abuse (Inside Government, 13th March 2012). New housing reforms will propagate ownership through re-vitalising of Right to Buy schemes. Incentives will be given to support tenants to buy their homes and take an upward shift on the housing ladder. Flexibility will become preference as social landlords would be allowed to offer tenancies for fixed lengths in stead of whole life, providing tenants more chances to shift. The government has reserved ?19 million over the next four years to help Local administration regain illegally occupied properties in England, prioritising fair play to ensure that the neediest get the desired support (Inside Government, 13th March 2012). The aims of the government on its housing policy in the long term are to provide decent homes to all within their budget. It is in favour of social housing at reduced rents to realise its distributional purpose in totality. Quality, affordability, unbiased approach towards housing and incentive to tenants is high on the government agenda although it is more possible in high-cost regions while comparatively lower-cost regions’ dependence on cash transfers and market-based systems would affect them the least. Rationing has its own costs, as all people cannot avail its benefits. Even if benefitting from rationing, people may face disadvantages of choice, mobility and deficiency in consumer rights over providers. But the benefits remain there to the government policy and systems can be leveraged to reduce the disadvantages (Hills, 2007). As a policy initiative the government is equally focussed on providing housing at reduced rents. It can be provided by local authorities and not-for-profit housing associations. The other way, principally, could be to offer subsidy or tax-rebates to landlords for not charging rents at the prevailing market rates. On the demand side, tax system can be supportive by making it tax-deductible. In England, a popular category of short-term support could be for people to become tenants via local administration rent deposit schemes Other support option available in England is relatively smaller for people with low income. Other interventions include government support for “intermediate tenures” through collective ownership or shared equity schemes of some type but it raises the question of whether this is the perfect use of resources (Hills, 2007). Basic Reform Options Considering the issues over social housing and the rationing process, some reforms have been in discussion such as allowing market to prevail with no rationing system. Rents nearer to “economic” levels won’t necessitate government support, resulting in increased housing supply by social landlords but it can affect the pace of benefits related to social housing through work incentives and increase in the number of mixed-income communities. Current tenancies would also bear the effect as systems of rewards won’t help in stopping huge losses to some tenants. Going beyond the drawn line on housing reforms, only modest reforms can help in leveraging the scarce resources and providing better reform alternatives. Housing reforms is not like ‘one size fits all’. Making fundamental changes in the social housing reforms can affect the market behaviour by not considering the impact. Therefore, it is more important to see that issues related to social housing are sorted out (Hills, 2007). The Experience with Recent Reforms The latest reform initiatives have been encouraging with the Local Housing Allowance strengthening the position of private tenants to get leverage from the bargain between their housing spending and what they get from the simplified system. As less people are aware of this, they are making wrong choices by selecting small houses to realise more saving. Where social housing option is scarce, the “choice-based lettings” are the desired option with home seekers. It has quickened the relief work, minimised turnover from new lettings and has proved to be cost-efficient for the local administration (Hills, 2007). Yet another strategy on “preventing homelessness” has paved the way for cost-effective choices like rent deposits, advice, mediation and support, diverting the statutory route of people from homelessness towards social housing. There are some common things observed in these latest housing reforms such as those in dire need of housing support have been attended to in a mature way, shifting towards a system where there is more space of varied choices from the vast range of alternatives for the needy people. People following the rationing process till the last stretch know that at the end of the stretch there are a number of choices for the local administration for their housing needs. It has been a positive experience for home seekers with the administration, pointing out that similar principle can be used on a wider scale (Hills, 2007). The Significance of the Prevailing Stock Social housing needs to be seen in the future perspective on what happens to the prevailing stock and tenants to determine the level of success in social housing. Such a review of the existing stock provides a glimpse of the benefits accrued from policy shift resulting in good maintenance of properties, thus providing satisfaction to the management as well. The problem comes to tenants when they find the ‘exit’ route blocked for those tenants paying sub-market rents and are unable to shift their subsidy. To face this, the tenants need to use different alternatives such as using more “voice” power. As stated in the latest Tenant Involvement Commission, a “dream landlord” needs to correct on top of all the basics and should then “go the extra mile” in providing true choice to tenants. Social landlords find themselves in the tight corner over the choices that they can make between, for example, rents and levels of service (Hills, 2007). Relative benefits of social housing remain to other policy instruments, as it is in the affording capacity of people and quality parameters. It has the potential to support the living of mixed-income communities and offering people a pillar of support to get a house (Hills, 2007). HRA Reforms Latest legislative reforms in the housing Revenue Account (HRA) is going to create a nationwide impact. Councils would have greater command over their housing assets. These housing assets are going to create rental income worth ?300bn over the coming 30 years. Reforms would help the councils in materialising investment resources worth ?50bn throughout the country, over 30 years. These actual housing assets would generate extra investment resources to help in designing the “housing business” through local service and investment preferences. Reforms would enable the councils to financially plan their resources; it has become significantly essential too. Councils now have wide range of choices to open up their investment prowess, which would be in sync with government policy preference to reduce the national debt (The Smith Institute, 2011). The government is keen to abolish the subsidy system in the HRA by 1 April 2012 and start with the self-financing of council housing. It is one of the most dynamic reforms with public housing policy, which would have long-term outcomes. The purpose of HRA reforms is to make the system transparent as the present system does not co-relate the rent charged and resources invested by the councils locally. Councils would get financial freedom and as a result have to be accountable for providing housing services. Reforms would bring to a finish the complicated central control and permit he council housing to be administered and financed locally. This way, councils would be more inspired to manage their housing stock considering the future perspective in stead of presenting doubtful yearly funding scenario (The Smith Institute, 2011). In the given scenario of funding cuts and other pressures on affordable housing, HRA reform is a “good news story” as many housing councils are providing their support to the stated reforms. The new self-financing system will initiate a leading change in social housing policy and create a long-lasting impact. Although there are still crucial issues with the proposals in the Localism Bill (especially over extra debt, future financial planning, and Right to Buy capital receipts) the common opinion in the housing sector is that HRA reform will be beneficial for all stakeholders including the councils, their tenants and their societies (The Smith Institute, 2011). Importance of HRA Business Planning The new reforms would strengthen the system to use its investment potential for providing housing and using it as a means by investing the financial resources and earning sufficient funds in return against the investments made in housing over a span of years. Nevertheless, to get the leverage, the councils would need to take business acumen strides to plan the HRA business (The Smith Institute, 2011). Conclusion Thus, the aim of the housing services is to provide sufficient supply of perfect housing for all tenures in a district. The government is keen to work on its aim of providing suitable housing choices well serviced by working together with all stakeholders including residents. The most neglected communities would find projects being initiated for their community growth. The present financial scenario and the changes in legislation would present an opportunity to housing providers to deliver their goods prudently. By taking the house occupiers in confidence before taking any big initiative, the mission of providing quality affordable homes for people from all walks of life can be comprehensively satiating and rewarding (Draft Document, 2011). Within the given national policy context, this strategy assimilates the local and national policies formulated in the light of recent and forthcoming legislation. The aim of the National housing Strategy (NHS) is to provide home possessing opportunities and create job opportunities through measures to ‘unblock’ the housing market. The strategy also provides proposals to change the social housing scenario by introducing changes to how houses are distributed, but also boost social mobility. The Homes and Communities Agency (HCA) Corporate Plan 2011-15 starts on focusing on the needs of local people and local authorities for their areas and the HCA’s efforts in that direction. The purpose of Localism Act is to transfer power from government to people, councils and societies (Draft Document, 2011). Social housing plays a significant role for about four million households in England. It provides many families tension-free environment and security in an essential aspect of their lives. The standard of housing it offers is generally higher than tenants with low incomes could spend in the private sector. The presence of social housing has secured affordability for its tenants although actual housing costs have doubled in the last decade. Social landlords many-a-times play a major part in the renewal and rebuilding of some of the most neglected regions of the country. It proves that the concept of social housing in British society is worth to be continued and any policy change should not negatively impact the benefits from social housing. The outcomes of the policy aims of social housing in some regions could not be satisfactory, which shows the pressure on social housing due to lack of capacity in availing other housing options and the decreasing re-letting of social housing from the supply-side. More efforts need to be aimed in this direction for the satisfaction of tenants and fulfilling the housing needs via the social housing option (Hills, 2007). Councils need to plan their business from investment requirement outlook, considering the risks involved to be linked with such funding solutions that are wise, dependable and long-term References: Draft Document., 2011. Draft housing strategy consultation. Available from: http://www.eastdevon.gov.uk/draft_homes_and_communities_plan-_work_in_progress.pdf [Accessed 10 January 2012]. Hills, John., 2007. Ends and means: the future roles of social housing in England. Case Report 34. Available from: http://sticerd.lse.ac.uk/dps/case/cr/CASEreport34.pdf [Accessed 10 January 2012]. Hooper, William., 2009. Rent seeking, laissez-faire and state capitalism. The Oligarch. Available from: http://www.theoligarch.com/rent_seeking_laissez_faire_state_capitalism.htm [Accessed 10 January 2012]. Inside Government. 2012, A new housing strategy for England: choice, flexibility and affordable housing. Inside Government, 13 March. Available from: http://www.insidegovernment.co.uk/economic_dev/housing-reform/ [Accessed 10 January 2012]. Leung, C. and Wang, W., 2007. An examination of the Chinese housing market through the lens of the DiPasquale-Wheaton Model: a graphical attempt’, International Real Estate Review. 10(2): 131-165. Available from: http://www.umac.mo/fba/irer/papers/past/vol10n2_pdf/07Leung%20and%20Wang%20_131-165.pdf [Accessed10 January 2012]. Nanto, Dick K., 2009. The global financial crisis and the U.S. interests. Congressional Research Services. Available from: http://www.fas.org/sgp/crs/misc/RL34742.pdf [Accessed 10 January 2012]. Sloman, John., Sutcliffe, Mark., 2004. Part H: The relationship between government and business. CH. 20: Reasons for government intervention in the market. Pearson Education. Available from: http://wps.pearsoned.co.uk/ema_uk_he_sloman_econbus_3/18/4746/1215202.cw/index.html [Accessed 10 January 2012]. Spicker, Paul., 2011. Housing and urban policy: an introduction to social policy. Available from: http://www2.rgu.ac.uk/publicpolicy/introduction/housing.htm [Accessed 10 January 2012]. The Smith Institute, 2011. Making the most of HRA reform. Pwc. Available from: http://www.smith-institute.org.uk/file/HRA%20Reform.pdf [Accessed 10 January 2012]. The Telegraph, 2012. House prices: should the government intervene? 11 January. Available from: http://www.telegraph.co.uk/finance/newsbysector/constructionandproperty/2791100/House-prices-Should-the-Government-intervene.html [Accessed 10 January 2012]. Leung, C. and Wang, W. (2007) ‘An examination of the Chinese housing market through the lens of the DiPasquale-Wheaton Model: a graphical attempt’, International Real Estate Review. [Online]. 10(2): 131-165. Available from: http://www.umac.mo/fba/irer/papers/past/vol10n2_pdf/07Leung%20and%20Wang%20_131-165.pdf Read More