Should the Government Intervene in the Housing Market (Potential/Current…
Should the Government Intervene in the Housing Market
Current state of the UK housing market
Potential/Current Policy Interventions
The Government decreases restrictions on house association building.
An adjustment of planning regulation
Help to Buy scheme
The Government builds houses
A cap on rental prices
No it shouldn't
Financial Cost of Public Funds
Dangers of Government Intervention
Ineffectiveness of Government Intervention
Yes it Should.
Efficiency & Correcting Market Failure
Adverse shocks are augmented because of high house price to income ratios
Households have less disposable consumption relative to their income. So disposable consumption will fall by a greater proportion due to any adverse aggregate demand shock, magnifying the effect of the shock.
Adverse Shocks are more likely because of high house price to income ratios.
Households will have higher leverage ratios. This increases the likelihood that a house price shock will push households into negative equity and cause defaults which could lead to a financial crisis.
Because there will be a stronger link between the state of the economy and house prices. (Because the economy is more dependent on house prices), a self-fulfilling fall in house prices is more likely. (Previously people would be concerned about a house price fall -> economy does worse, nothing really happens. With high house prices, concern about house price falls, economy does worse, house prices fall.)
It's also possible for house price bubbles to develop where investors invest in housing as an investment good rather than a consumption good. This makes the price of housing dependent on the expected future value of housing. Makes the market very volatile and increases macroeconomic stability.
High House prices (as a multiple of incomes) with similar changes to house prices as a proportion of GDP (say 2% house price shock) will have a larger wealth effect on households. Increase no. of defaults, greater decrease in consumption from wealth shock (mention Lifecycle and PIH hypothesis).
Not much of an argument here