Question

Five housing policies are described below, based on examples of measures that have been introduced or proposed in the UK, in response to a chronic shortage of affordable houses in many regions.

Drawing on the module material, write an essay that explains, using the ‘demand-and-supply’ model, the likely impact of each policy on the equilibrium quantity and price of houses, and how this might affect the UK’s affordable housing shortage.

• Policy 1

  Advice is given to the government to allocate more land for housing development, simplify procedures for planning permission, take more account of local housing need in deciding on planning applications, and make regulation on land use more effective through giving more freedom for housebuilders to choose the sites to develop.

Answer 1

The housing market is a very good example of showing the module of ''DEMAND' and ''SUPPLY''. The law of supply and demand is a basic economic principle that explains the relationship between supply and demand for a good or service, and how their interaction affects the price of that good or service.

Law of Demand: When there is a high demand for a good or service, its price rises and vice versa

The law of demand dictates that people will have low or no demand for a good that has a higher price. That happens, of course, when all other factors remain equal. People tend to sacrifice something that comes at a higher cost, which curbs demand. Similarly, lower prices drive demand, meaning consumers value and purchase something more when it's cheaper.

Law of supply : If there is a large supply of a good or service but not enough demand for it, the price falls and vice versa.

When it comes to the law of supply, prices drop when there is an increase in the supply of a good or service in the market. But when prices increase, the number of goods and services tend to drop. That's because it tends to cost more to produce and sell goods at a higher price.

The housing market relies very heavily on supply and demand, which is why it is very prominent in the industry. Each housing transaction involves a buyer and a seller. The buyer places an offer on a property, leaving the seller to accept or reject the offer. The law of supply and demand dictates the equilibrium price of a property.

As per above question we are given the assumption that there is chronic shortage of affordable houses in many regions. Let us look the effect of shortage of housing supply on demand market and supply market individually.

As per above daigram, Due to shortage of housing there will be increased demand of housing in the Real estate sector. Supply refers to supply curve and Demand refers to Demand curve in the above daigram.In daig A, there will be increased demand ( Demand curve will shift righwards from D1 to D2) due to shortage of housing supply which will lead to increased quantity demaned of housing and increased prices in housing sector. As a result , quantity demanded will increase from Q1 to Q2 and price level will shoot up to P2 from P1.

On the supply side, As per daigram B, Due to shortage of Housing supply , Supply curve will shift leftwards from S1 curve. As a result , Quantity supplied will fall from Q1 to Q2 and prices of housing will shoot up to P2 from P1.

FACTORS AFFECTING HOUSING SUPPLY AND DEMAND

Supply and demand is never an easy thing to measure in the real estate market. That's partly due because it takes a long time to construct new homes and fix up old ones to put back onto the market. Similarly, real estate is not like other industries in that it takes a lot of time to buy and sell homes and other properties.Some of the factors that influence housing demand include lower interest rates or borrowing costs. When interest rates are low, people are generally willing to take on more debt. They may be able to finance the purchase of a home because the amount of interest they have to pay isn't burdensome. If more buyers flood the market, the demand for housing increases. And if there's a limited supply of housing inventory, that makes people in a low interest rate environment want to purchase even more.

EFFECT OF POLICY : Advice is given to the government to allocate more land for housing development, simplify procedures for planning permission, take more account of local housing need in deciding on planning applications, and make regulation on land use more effective through giving more freedom for housebuilders to choose the sites to develop.

Tha above government policy to increase the supply of housing and allocate more land in order to create more demand and give more market freedom can shown through below model of Demand and Supply.

Intially there was shortage of housing supply in many regions due to which Government implelemented the policy of giving more land for housing development and giving freedom in housin planning and deciding sites accordingly. This will create change in demand and supply model. Due to initial shortage of housing ( Refer above daigram of Deamd and supply model) , Demand for housing got shoot up due to which demand curve will shift rightwards to D2 from D1 which will result in increase in price and increase in quantity demanded.

Now due to Govt policy of more availablity of housing, Supply curve will shift rightwards from S1 to S2 due to which prices will fall and Quantity of housing supplied will increase.

The final impact will be increased quantity demanded and supplied at same price level (P1). The increase in price got curbed by the government easing policy in housing sector due to which Excess demand will be removed by increased supply of housing and the unnecessary increased price level will be controlled by the availability of more housing.