Extent to Which Property Market Failure Give a Case for Public Intervention - Essay Example

Introduction Property markets are considered as one of the most significant markets in UK because of its socio-economic significance. Over the periodof time, the property market has surged to a point where it is now considered as one of the reasons for failure of UK’s financial system and as such many are arguing that the property market was not adequately regulated to prevent such episodes from happening. In order to understand that property market, it is critical that we must understand the correlation it shares with different other markets in the economy. The current financial crisis clearly indicates that the nexus of the financial as well as property market can lead to the overall failure of the markets because the volatile nature of one market can readily impact another market if they are correlated with each other in any sense. In the past, it has been the practice of the financial institutions that they greatly offered easy money which allowed relatively higher volume of people to buy their own homes. This phenomenon, however, also gave rise to the speculative activity within the market which not only led to the price appreciation but also made the market more volatile and prone to economic shocks. This effect has been so much that it was estimated that more than 590 billion British Pounds were wiped out from the property market only during 2008. (Knapton, 2008). Such symptoms indicate that the property market is prone to failure and as such may require the government intervention in the market through planning controls. This essay will discuss whether the recent failure makes a case for government to intervene in the property market or not. Why markets fail? It is argued that the free markets do not always provide the efficient allocation of resources. There are various causes of market failure and as such information imperfections, externalities as well as capital market imperfections are some of the causes which can be cited as the few major reasons behind the failure of the markets. (Keep,2006). Whether government shall intervene into markets to correct them or not is an issue of great debate which has been re-emerged again. During 1990s, it was argued that the extension of credit has a greater macroeconomic impact on the economy as credit has extensive linkages with different markets such as property markets as well as consumer durables.(Eichengreen & Mitchener, 2004). Property markets along with other markets, therefore, started to grow and reached to a level where it failed to accommodate the economic shocks and resulted into the failure of the market. The era of fiscal intervention seemed to be over as during last three decades it was strongly argued that the markets shall be allowed to work freely and government shall have a minimal role in the governing of the markets. However, recent failure of financial as well as the property market indicates that the option of government intervention is still a plausible option and government shall take into consideration the option of how to correctly regulate the market. UK’s property Market & Government Intervention UK’s property market has remained one of the most lucrative sectors in the economy as backed up by strong support from financial markets, the sector started to boom with rapid capital appreciation. However, during the whole period, the market remained largely unchecked and as such was allowed to float on its own. It is argued that due to relative boom of the market, more inexperience real estate agents entered the market who could not understand the market dynamics very well and as such the cumulative effect of their actions resulted into market imperfections as well as externalities. To discuss whether the UK’s property market failed due to the market imperfections or externalities is another issue to discuss. It seems that the externalities are one of the chief reasons for market failure because this market failure is a collective failure of the economy and not the property market itself. The dynamic models of the market advocate that the markets are subject to short term adjustments and can fluctuate, to a certain extent.(Chavas & Holt,1993). However, the recent failure of the market does not seem to be a result of short term fluctuations and as such is considered pursuant to structural deficiencies of the market itself. The government, with the mandate to ensure the welfare of the individuals in the society and as such any issue which has socio-political implications for the State requires the attention of the government to intervene. It is critical to note that with large scale default of subprime mortgage loans, banks and financial institutions started to repossess the homes which itself was an issue of great concern for the government itself. The current failure of the property market, therefore, required that the government must intervene either through the planning controls in the market. Though it may be easily argued that the market imperfections are necessary part of the market however, given the current complexity of the failure and its magnitude, the intervention of government at least in terms of imposing taxation on the transfer of property, development of land, building of new homes etc so that the overall demand in the market is rationalized. Further, this can also be done in order to reduce the impact of speculative activity on the market and as such at least prices would remain control and may not go out of hand. Further, the government intervention in terms of planning control may also encompass the regulation of the financial markets to restrict the appetite the financial institutions to lend irresponsibly. Conclusion Government through planning controls can easily correct the current market failure of the property market however, this effort, if undertaken at all, shall be short term in nature and as soon as the market start to correct itself, the government’s role shall gradually decrease to allow the property market to regulate itself as government intervention may further lose the efficiency of the market rather than improving it. Reference list   1. Eichengreen, Barry and. Mitchener, Kris J (2004). THE GREAT DEPRESSION AS A CREDIT BOOM GONE WRONG. Research in Economic History. 22, pp.183 - 237. 2. Keep, Ewart (2009). Market failure and public policy on training: some reasons for caution. Development and Learning in Organizations. 20, pp.7-9. 3. Chavas, Jean-Paul and Holt, Matthew T. (1993). Market Instability and Nonlinear Dynamics. American Journal of Agricultural Economics,. 75/1, pp.113-120. 4. Knapton, Sarah (2008). £591 billion wiped off UK property market in 12 months [online]. [Accessed 28 March 2009]. Available from World Wide Web: . Read More