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.

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.

Policy 2
Landowners will have to pay a tax for plots of building land for which building permission has been granted but no work has been carried out and the plot remains empty. This is to avoid “land banking” – keeping land undeveloped until it acquires more value due to manufactured shortage.

Policy 3
The UK government ‘Help to Buy: Equity Loan’ is a scheme that allows buyers of newly built homes to reduce the deposit needed to 5% while keeping mortgage to 75% thanks to a loan by the Government of the remaining 20% of the cost. If buyers stay in their home for at least five years they won’t have to pay any loan fee on the government scheme. The government has also increased the limit of equity loan for London properties to 40% to reflect current property prices.

Policy 4
The government has introduced a three-per-cent stamp duty surcharge that property owners are liable to. Some observers have said that this would push amateur buy-to-let landlords out of the market, as they are less well resourced to cope with the tax change compared to corporate developers. Most of the landlords who might be pushed out of the letting market by this measure are wealthy parents investing for their children’s future or those who have inherited properties.

Policy 5
The government has set up a programme of guarantees to support lending to smaller housebuilders by taking on some of the borrowing risk usually borne by developers in their projects

Answer 1

Policy 1:

Allocating more land, simplifying procedures, considering local need for houses,giving more freedom to housebuilders etc. is going to facilitate the process of house-building and hence, increases the supply of houses in the economy. This will shift the supply curve to the right, thus increasing the equilibrium quantity of houses and reduces the equilibrium price of the houses. So, as the prices fall, it will help to reduce the affordable housing shortage in the UK. Take a look at fig 1.

Policy 2:

As landowners have to pay taxes for their plots if they keep their lands empty without building houses, waiting for them to acquire greater value i.e if they indulge in land banking. So, the landowners will build houses on their plots instead of keeping them as it is. So, there will be a resulting increase in the supply of houses, so this will shift the supply of houses to the right. This will reduce the equilibrium price of houses and increase the equilibrium quantity. So, this will impact the shortage of affordable houses positively, and the shortage will reduce in UK. Take a look at fig 2.

Policy 3:

In this policy, buyers will need a deposit of meagre 5%, mortagage will be 75% and the remaining 20% will be funded by the government in the form of a loan, "Help to Buy: Equity Loan". Also, if buyers reside in the house for at least a duration of five years, there is no loan fee charged by the government on this loan. Also, the limit for the equity loan has been increased to 40%. So, this will make buying of a house very cost-efficient for the home-buyers and will provide them a great incentive to make use of this scheme and buy their own home. So, this will increase the demand for homes in the market, leading to a rightward shift of the demand curve. This will increase the equilibrium quantity of houses, but will also increase the equilibrium price of the houses. So, it will have an adverse impact on the existing affordable housing shortage in UK and increase the shortage further. Take a look at fig 3.

Policy 4:

A stamp duty is charged by the government and levied on the property owners when they transfer the title of the property from one person to another, typically during the transaction of a property. Buy to let landlords basically invest in a property and then give it out on rent. So, basically with a 3% increase in stamp duty, buyers wont find it profitable to pay that extra charge while buying the property and then letting it out on rent. So, they will be pushed out of the market. Also, landlords such as wealthy people or people who have inherited properties will be pushed out. So, the main participants remaining in the market will be corporate developers and proffesional property builders. Increased stamp duties are supposed to discourage household mobility and prevents people from moving houses due to teh increased cost. It slows down the housing market and makes it inefficient. It deters families to moving to more suitable homes. So, this will lead to a leftward shift of the demand curve, and the fall in equilibrium price as well as quantity. So, this reduced demand will increase the number of affordable houses and reduce the affordable housing shortage in UK. Take a look at fig 4.

Policy 5:

As government is providing guarrantee to the developers and reducing their risk of providing loans to smaller housebuilders, there will be a greater number of loans given to the smaller land builders. So, greater number of houses can be built by the smaller land builders. So, this increase the supply of houses, and shift the supply curve to the right. This will reduce the eqilibrium price and increase the equilibrium quantity. So, as the prices fall, it will help to reduce the affordable housing shortage in the UK. Take a look at fig 5.