The Housing Market and Market Failure

Despite the shortage of houses the government has put a limit on building new houses. This is because new houses will cause the loss of “green belt” land. This loss of the environment could be said to be a negative externality

Other negative externalities of new houses include increased traffic on the roads causing congestion and pollution.
Those on low incomes may not be able to afford to buy or rent a house. This has become more of a problem with the boom in housing prices.
Boom and Bust in the Housing Market. This involves rapid movements in the price of housing.

In times of falling house prices, some house owners can experience negative equity causing lower AD.
Rising house prices increase AD maybe causing inflation. Booms encourage speculation and make houses unaffordable for many people

Legislation about building houses on greenbelt land
Govt subsidies for building houses. However this has been quite low in recent years
Provision of council houses. However in the 1980s many council houses were sold to the occupants at reduced prices. This has reduced the quantity of housing.
Also council houses have often been associated with higher levels of crime and vandalism, especially in many of the new tower blocks built in the 1960s.
To reduce fluctuations in house prices the MPC can change the interest rate. However the problem is that housing prices are only a small effect part of the economy. Despite recent increases in house prices (95-02) interest rates have not been cut because inflation has been low.
Maximum Prices. The aim of this is to reduce the price of rented houses, however this could result in a shortage of houses in the rented sector.
Also problem of black market
Housing Benefit. Those on low incomes can apply for housing benefit which enables them to rent housing.
Policies to reduce speculation in the housing market
Stamp Duty (this is a tax on selling a house)
Abolition of MIRAS ( this was a tax relief on having a mortgage)

House Prices UK