Housing Finance and Economics - Coursework Example

HOUSING FINANCE and ECONOMICS 1970 is important in outset of new labor’s housing policy. Post World War II the government had considered few steps which helped to keep commitment to fulfill the employment, to develop a Keynesian welfare state and also to drift on the people’s rising of real income, wealth and affluence. But after 1970 the picture was changed a lot and the market has faced a rapid change in macro factors. Those are like free trade and markets and more than this the government intervention was also reduced a lot. So after 1970 the market was quite liberalized. The housing system in United Kingdom had turned around after 1970s. Owner-occupation and social renting had taken the place of private renting as people have money and option to buy ownership houses as well as local authorities made construction for occupancy of public. It made drastic change in market. Other factor was rent control system which impedes private landlord to invest further in real estate. Gradually private renting system reduced to a certain limit till 1980s. (Sherman 2008). But it was observed by experts that private renting system was necessary in emerging globalization. In 1980s Conservative Party came into picture. Their aim was shift of house property stock from local authority to owner occupied authority. Owner occupied sector later had been modified as Registered Social landlord. Many houses were transferred from local authority to Registered Social Landlord sector as a result of arrival of Right to buy policy. These houses are maintained by non profit making landlords. These dwellings are later handed over to housing associations known as Local Housing Companies. Thus the system paved the way of low cost living houses. Right to buy and deregulation of mortgage finance encourage common people to incline to buy residence. In addition to this deteriorating condition of housing where they lived and decrease of subsidies result in higher rent which provoke people to own houses rather than rent a house. Top of this the residualisation was a considerable factor for social rented sector and along with this the poor image of social housing has drifted on this process. (Birchall 1992) During this period the socio economic and political factors have accelerated this residualisation. In the period of leadership of Margaret Thatcher Britain witnessed a great fall in macro economic factors like GDP, industrial output, investment. Most of bankruptcy of company and joblessness had taken place in that time. As a result Government cut down planned spending on housing effecting economy in general and housing in particular. In 1988 an act appeared namely Housing Act 1988. This Act emphasized on mixed system of private or public funding and with remarkable change in right and process of laying down of rent for tenants. In 1990 housing associations emerged in great deal as Conservative party made it important. Demand in housing stocks is turned down for various socio economic reasons. It is evident that in the part of rent, tenant transfer, structures and relationships with authority this act had considerable outcome. Private funding in housing sector helps enormously to develop large establishment in housing association sector. Government made policy for housing association to be main provider of subsidized housing. As a result the association had pressure to help local authority to allot home for statutorily homeless household. Major mortgage arrear, repossession, Government’s lack of strategy bring about people in homeless condition later. (Marsh 2001: pp.1-9) A huge deficit in budget of public expenditure is shown by Government in subsequent year. After general election of 1992 Government’s intention to cut down grant rate was clear. In 1997 Labor party government came to reign in 1997. Labor party had formulated several policies regarding housing allocation for homeless people. During this period affordable rent of house was introduced by the housing policy of Government. Among the three types of housing tenure like owner occupation, social housing and private rented accommodation, rented housing is solution for the homeless people. In the policy the homeless people are not properly accommodated through social housing and private rented housing. (Malpass 1999) From 1997 the social housing was continued to decline till date and 60,000 fewer social houses now existing in UK. At the same time there is no compensating growth in private rented houses, by numbers only 20,000 private rented houses built up after 1997 in comparison to the reduction of 60,000 social housing. Even in this policy is negative for the single person. As the social housing is reducing continuously, so the by following the rules under policy families with more number have better chance to be allocated in the social housing. This new policy is promoting the home ownership but ultimately few people are forced to stay with friends, hostels. This policy is well established in Scotland but less prominent in Wales. In these regions like England, Scotland and Wales the policy is to recognize the shortages of rented housing and are promised to solve but the real picture is different. In 2004 the housing act appeared to improve this situation. By this policy the landlord are getting better option through mandatory licensing like houses of multiple occupation and private licensing. By this policy it is possible to enact the Empty Dwellings Management Orders and through this act another 25000 homes will be helpful for those people. Another strategy under this policy, which was enacted in 2005, was also supportive to increase the supply of housing. (Crisis and NPI 2006) Our want for the houses is insatiable but the availability to individual is constant. Here the distribution is important as the allocation of resource for best outcome is desirable. So the resource is housing which has scarcity and also if it is distributed to one then another will lose the opportunity. So opportunity cost concept is also applicable to maximize the allocation or another way can be descried like if our known set of resources is used for houses then those same set will not be used for other purposes. Even opportunity cost is also applicable for individual also as the investment made for housing forced to squeeze them their investment in other possibilities. Here the distribution model is to be prepared such way that the allocation is maximized after taking care of price, cost and social pattern, so this one is optimizing in economics. If social factor is an important determinant in this model then the welfare concept is implicitly taken care of. Here in this housing allocation model the resource should be allocated efficiently and equitably. Production efficiency and allocative efficiency both are important in housing distribution model. Production is the function of land, capital and technology. In UK the capital is cheaper then land, so the production efficiency comes with better technology and low use of land. For the allocative efficiency, the allocation for welfare of individual and society is important. The Pareto optimality is well defined here as in the known distribution of income someone will be better off with anyone’s worse off. Now to consider the social welfare the minimum standard is implicit again, as the housing comes under that minimum standard. Here the equity point comes as the factor with income distribution, opportunity and cost. In this housing distribution the method of economic organization is also important. If it is like market system then the price is main determinant and works like incentive and force for the process. But if economic organization is like other extreme named administrative system then allocation is controlled by a central authority, which is based on information and social welfare. If the distribution runs properly then the government intervention is limited but UK market is in between the market system and administrative system and as well the government intervention is also prominent. The key natures of housing have economic attributes like demand supply with adjustment, a necessary goods but captures a major part of income, follows finance market as financing for ownership is prominent feature for individuals as consumer or producer, follows social policy etc. So with this complex feature the housing market is not efficient and as a result the government intervention likely for UK and as well for other developed countries. (Balchin & Rhoden 2002). Housing finance and investment is important again as it shows the quality and time span of consumptions of houses. Other way it describes as a force in demand supply parlance. Macroeconomic trend, financial innovation like mortgage backed securities, liberalization from financial and economic front, advancement in technologies, new funding sources, supportive government policies are the main determinants of the housing finance. First macroeconomic factor is volatility of inflation and interest rate, secondly the growth of output. These factors have positive effect in UK for housing finance that is lower the inflation, interest and income volatility will attract more financing through banks, mortgage loan etc. Decline in nominal interest rate also effect on the demand supply of housing. So the housing economics and finance is strongly correlated. In UK the housing finance does mean more than the government because there the major part of the investment is from the income or from privately. This payment from income is as repay for meeting up the loan which is taken by the owner from the bank or building society. In the social rented housing of UK, the private financing is also a major factor along with the government subsidies. Banks provide loan to the social landlords and building societies act as private house holds in the distribution model. In housing finance, housing is to be considered as a place to hold the wealth. So housing could be considered as stock. So, housing stocks are again assets under the hands of owners in hope of future cash returns. Other way to say, that the sacrifice of present benefits for purchasing future goods by using the return from present investment. Investment in housing can help the holders to spend in futures for housing or non housing activities. Another aspect of housing is role of government, because the housing is expensive and valuable but comes under necessary good. So government regulates different participants like consumers and producers in housing finance through the different ways like controlling the interest rate for repayment of loans and mortgage loans, controlling rents etc. (King 2009,pp:1-5) Demand of housing (DH) is the depended variables and depends on the income, price of house comparing to the other goods, tastes and number of households or supply of houses in the market. If we denote income as Y, price of house related to other goods as PH/Pother goods , tastes as T and supply of houses as N. DH = function ( Y, PH/Pother goods , T and N). Demand shifts to left in demand supply curve, due the decrease of price and henceforth the change in equilibrium point, which depends on the supply curve. (See exhibit 1 and 2). Price elasticity of housing demand is important as price fluctuates with different macroeconomic factors and policies. Usually slope of house demand curve signifies this elasticity and elasticity value may ranges from less than 1, 1 to more than one. So the unit change of housing price due to interest rate change can affect more than 1, 1 or less 1 to the quantity demand of housing. This change in price is may be due to political factors, government intervention or due to change in policies. From 1970 to 2009, it is observed that government intervention in policy changes was the major reason for the change in quantity demand. Income effect in housing is like if income increases the demand of the goods increases but the income elasticity of demand is less than 1. But this change is slow and due to imperfect market the adjustment in demand is different from expectation. Decision for owning house is irregular and which depends on permanent change in income not on current income. There is difference in elasticity between the tenants and owner occupation. Attributes for tenants are different from owner occupiers. Tenants buy the consumption related factors but owner occupiers purchase assets along with the controls. That’s why the income elasticity for tenants is 0.6 but 0.7 for the owner occupiers. Measuring the price elasticity of housing is relatively complex because of difference in opportunity cost among the tenants, landlords and owner occupiers etc. Even the company and individual see the opportunity loss in different way as the interest rate charge is different for them. Supply of housing in short run can be defined by two ways. Through value term it can be represented as capital stock of housing in period t is equal to capital stock of housing in period t-1 – depreciation + investment. If the supply is measured in numbers then the supply in time t is difference in supply in time t-1 and demolitions or summation of completions and conversions. Demand of housing is function of price of housing and also other determinants, which are derived from other factors like production and productivity. Productivity of land is important example under productivity. On the other side the supply of land is inelastic. So, higher demand forces to increase the price of Housing. (See exhibit 1).In short run the marginal cost increases rapidly and supply of land is also inelastic. Hence the price of land in short time reflects the market price of existing dwellers. But in long run the revenue earning will be more than the marginal cost and will continue until the price equals to marginal cost equals to average cost. (See exhibit 3)(Taylor 2006, pp: 61-75) Interest rate, housing transfer price, Skill shortages for housing development and lack of supply of housing, along with these refusals to planning permission has gone up after 1997 are the main determinants of the high UK prices. Due to this imperfection in housing market the intervention of government is likely. During this post 1997 period the new dwelling was built less than the previous decade. So the rate of housing development is clearly slowed down during this period and hence it is impacting on the demand supply equilibrium. Ultimately this change in equilibrium will be stabled up in long run but this un-equilibrium condition is impacting upon the economic growth of UK and also living standard. (BBC News 10 December 2003). After 1997 the housing prices has increased almost 50% and at this moment the higher interest rate and global crisis are cause of concern. There are main two factors for the recovery of financial crisis like inventory accumulation and fiscal stimulus. And the positive sign is floating around the globe that the recovery will sustain. Hopefully the Bank of England will continue to increase the interest rate for monitory stability. This increase in interest rate will negative impact on the price of housing for short run. At this moment consumption and investment both are prominent. But here the question is how much these factors are impacting on the housing demand and also these consumption and investment factor is correlated to the housing development. (BBC News 23 September 2004 & Riley, pp: 1-20) Housing investment is now and will be depressed for some time because those have already over borrowed before crisis, they will try after this crisis to save more and less consumption. This phenomenon is now affecting in housing development for short but in long term it will result well. During the coalition government and after 2009 the interest rate change and global crisis are two main economic factors, which are affecting the housing policy development. In the coalition government the housing is less taken care off. Now debate is on going regarding the policy on focusing on whether the private sector or the social housing among the coalition parties. This distribution can be described in economics as Pareto Distribution for better off or worse off. Housing minister Grant Schapps along with the Prime Minister want to stop the life long tenure of service for the council house but other side Liberal Democrat is not willing to force them to resettle them in private sector. So if the emphasis is on private sector the Housing Finance issue should be dealt with properly. If the demand for the private rents increases then the private landlord will go for more money and top of this if the interest rate increases then again there will be a lot chaos in development. Recent Emergency budget has helped a lot, especially the LHA payment but the interest lending rate cut again is not supportive. Another good initiative is forming the local enterprise partnership. According to new proposal the councils will attract the local area with the help of local business partnership and fix the business rate for sustainable growth and economic development. For this initiative the coalition government has declared billion of Regional Growth Fund. This initiative will ultimately help to end up the debate between the coalition as the distribution of is less from center and billion of money collected from business rate are redistributed to locals. Council is now taking part in distribution and also their ownership by retaining business rate will help in economic and Housing development in near future. (Shelter 2009 & International Monetary Fund October 2010) Exhibit1 Shifting demand curve Impact of increasing income (Y) Impact of decreasing income(Y) Exhibit 2 Elasticity of Demand Exhibit 3 Price determination in short-run Price determination in long-run References 1. Marsh, A. (2001). Two steps forward: housing policy into the new millennium. The Policy Press, 2001. Available from : http://books.google.co.in/books?id=aRNSPpnU3cYC&pg=PA1&dq=new+labor+housing+policy&hl=en&ei=w77UTJuZBI2avgO-x_jhCQ&sa=X&oi=book_result&ct=result&resnum=1&ved=0CDQQ6AEwAA#v=onepage&q&f=false 2. Malpass, P. (1999). Housing Associations and Housing Policy in Britain Since 1989.Taylor & Francis Ltd. (0267- 3037/99 /060881-13). Available from: http://www.anst.uu.se/jiche227/Interntional%20Housing%20Finance/UK/Housing%20Associations%20and%20Housing%20Policy%20in%20Britain%20Since%201989.pdf 3. Crisis and NPI. (2006). WIDER POLICIES Housing Policy Overview. A review of government policies which impact on homelessness. Homelessness Policy Watch. Available from: http://www.crisis.org.uk/policywatch/pages/housing_policy.html 4. Balchin, P.N. & Rhoden, M. (2002). Housing policy: an introduction. Routledge, 2002. Available from: http://books.google.co.in/books?id=kTrY_EKCQ0sC&pg=PA103&dq=Housing+Finance+in+the+UK+Gibb+,+Munro+%26+Satsangi&hl=en&ei=qOjTTJGMH82HcfuZjf4E&sa=X&oi=book_result&ct=result&resnum=3&ved=0CD8Q6AEwAg#v=onepage&q=Housing%20Finance%20in%20the%20UK%20Gibb%20%2C%20Munro%20%26%20Satsangi&f=false 5. Birchall, J. (1992). Housing policy in the 1990s. Routledge, 1992. Available from: http://books.google.co.in/books?id=BU4OAAAAQAAJ&pg=PA29&lpg=PA29&dq=housing+policy+uk+1990&source=bl&ots=_w-CXlwItU&sig=-k5rcqGr2bvl4X3ga3Ws7FE9L9w&hl=en&ei=YGXVTKafLMfCcZq1zfcL&sa=X&oi=book_result&ct=result&resnum=5&ved=0CDEQ6AEwBA#v=onepage&q=housing%20policy%20uk%201990&f=false 6. King,P. (2009). Understanding housing finance: meeting needs and making choices. Taylor & Francis, 2009. (2, illustrated). Available from: http://books.google.co.in/books?id=WYtTbKE2RoAC&dq=UK+housing+finance&source=gbs_navlinks_s 7. Riley, G. Housing Market Economics Digital Textbook. Tutor2u Limited. Available from: http://books.google.co.in/books?id=idvQaA6mjD0C&pg=PA4&dq=economics+in+UK+housing&hl=en&ei=iafWTJaeGYO0vgPdgcW3CQ&sa=X&oi=book_result&ct=result&resnum=2&ved=0CDoQ6AEwAQ#v=onepage&q=economics%20in%20UK%20housing&f=false 8. Sherman, J. (2008). Labours housing policies are condemned as failures, The Times. Available from: http://property.timesonline.co.uk/tol/life_and_style/property/buying_and_selling/article3500077.ece 9. BBC News. (23 September, 2004) IMF warns on global house prices. Available from: http://news.bbc.co.uk/2/hi/business/3682144.stm 10. BBC News. (10th December 2003) UK home supply way below demand. Available from : http://news.bbc.co.uk/2/hi/business/3305457.stm 11. International Monetary Fund (October 2010). World Economic Outlook: Recovery, Risk and rebalancing. Available from: http://www.imf.org/external/pubs/ft/weo/2010/02/pdf/text.pdf 12. Taylor, J. (2006). Principles of Microeconomics. Cengage Learning, 2006. Available from : http://books.google.co.in/books?id=4x3sO4cjFqcC&pg=PA81&dq=housing+demand+supply+graph&hl=en&ei=ML3WTPXTD4yWvAPQ0ZCaCQ&sa=X&oi=book_result&ct=result&resnum=9&ved=0CF0Q6AEwCA#v=onepage&q=housing%20demand%20supply%20graph&f=false 13. Shelter. (2009). What is social housing. [online] Available from: http://england.shelter.org.uk/housing_issues/Improving_social_housing/what_is_social_housing Read More