Running head: London Housing Market 1

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 London Housing Market 2

Table of Contents
Introduction.................................................................................................................................................3
Market Imperfections and Market Failure Affecting Entrepreneurship Activity.........................................3
Market Imperfections and Market Failure Affecting Labour and Finance...................................................5
UK government economic policies..............................................................................................................6
Conclusion...................................................................................................................................................8
 London Housing Market 3

Introduction
Housing has unique qualities that impede the pricing mechanism's effectiveness and limit
optimum allocation of resources through the marketplace. These factors make the real estate
market flawed, preventing it from operating smoothly and efficiently (Best and Kleven, 2018).
The flaws lead to the instability of property values, which can sometimes put them out of grasp
of people with limited resources. As a result, the government’s responsibility is to strive to fix
the flaws so that housing as a commodity is available and reasonable to all people and groups in
community.

Market Imperfections and Market Failure Affecting Entrepreneurship Activity

These market imperfections that contribute towards market failure lead to entrepreneurs
being skeptical in entering risky markets. Any economics system that does not compete with the
stringent provisions of the theoretical accurately—or purely—competitive marketplace is known
to be as an imperfect market. Chuang et al. (2018) Stated that every marketplace in the actual
world is flawed. Thereby, rivalry for industry percentage, elevated entrance and egress obstacles,
a variety of goods and services, price increases set by consumers rather than market forces, and a
limited number of industry participants all impact the research of real markets.

When the market economy results in an unequal distribution of power, it is called

government failures. This concept proposes a remedy to housing price issues by arguing for
proper government involvement. The ideas are based on traditional utility theory and argue for
official involvement in the property sector. Market failure may be explained in two ways. The
normative theory of market failure, also known as public interest economic regulation theory
(PIERT), is based on classic economic principles, which is focused with the development and
preservation of people's pleasure and happiness (Zhang et al., 2019). Another perspective is
distributive justice, which relates to the equitable distribution of advantages (and liabilities)
among society's participants. Given the shortage of assets, the problem has been determining
how to distribute finite funds among the various people, organizations, and industries that make
up any given community.

The shortcomings highlighted in this market place are market characteristics that only
serve a few individuals, the socioeconomic element of availability, and excessive spending costs.
 London Housing Market 4

Due to the affordability issues, even with the imperfections the market does function
however it only benefits a certain class of people leading to the market failure. As mentioned in
the case study, majorly the decrease in the supply has occurred in the affordable housing segment
making it extremely difficult for the working class to afford a house. As mentioned by (Hamnett,
2018) a house is something that is generally an individual’s maximum expenditure, and currently
in London housing market only the demands of the rich are being met.

The challenge of adjusting housing supplies is a key economic characteristic of housing.

Due to zoning constraints, the actual total supply of property is largely set, and the balance of
diverse land applications is hard to change. The housing business is slow to react to increased
desire owing to the period it takes to secure building approval, negotiate expansion funding,
build structures, and organize discharges. Supply, on the other hand, finds it harder to respond to
a drop in demand. Demolishing or changing structures to accommodate such a drop in demand is
not always feasible or practical. McKee et al. (2021) highlighted that the housing sector's
absence of reactivity (or supply inelasticity) makes it particularly sensitive to economic ups and
downs.

Housing is a relatively costly product, typically considerably more so than other

consumption items. Because of the typically high housing costs, it cannot usually be bought
altogether from average earnings or assets. Housing is the most expensive item in most families'
expenditures.  As a result, house financing is frequently accomplished through various schemes
involving many resources, such as upfront fee or mortgages with funds obtained from lenders or
other financial institutions (Cheshire, 2018). As a result, the accessibility and supply of
appropriate credit in the financial market is inextricably linked to the provision of residential
housing. As a consequence, developments in the financial industry can have a significant
influence on the real estate market.

As mentioned in the case study, due to the decreased supply in council house building
program, decreased the number of affordable housing leading to the imperfection in the market.

In light of the market failure in consideration of the London housing market, the market
imperfections that are found in every market can impact the operational activities. In this case,
the imperfection of insufficient supply to meet the demand of affordable housing, reduced
 London Housing Market 5

council supply, fluctuating costs and prices along with other causes leads to the market failure.
Due to the lack of predictability within the market entrepreneurs are skeptical with their
investments. As mentioned by Jackson and Jabbie (2019), the housing market is rather old since
Second World War and new construction is quite expensive hence the investors risk would be
relatively high. Even though in the beginning of 1990 the equity of housing industry was
extremely profitable over the time it has transformed to negative equity. This means that
entrepreneurs, while interested to study the market would not prefer to enter such a market that is
risky, unpredictable and has recently resulted in negative equity.

Market Imperfections and Market Failure Affecting Labour and Finance

The London Development Agency has classified skills shortfalls in the building sector in
London as persistent, and has just launched a new plan to address them: the London Framework
for Regional Employment and Skills Action (FRESA) (McAllister, Shepherd and Wyatt, 2018).
The number of large building works in the works in London is significant, and experienced
labour constraints in the sector might pose a significant problem for the domestic building
business in London in the coming years.

This incapacity to purchase a property would turn out to be an especially challenging

problem for the people that are not employed and are dependent upon limited salaries received
from either the state or other ways. The increase in the housing expenditures might negatively
affect the workers employed in low-wage markets and professions whose pay does not align
properly with the standard of rent (Fingleton, Fuerst and Szumilo, 2019). Consequently, an lack
of public mobility can have lengthy repercussion for London firms (and their employees) that
depend on supporting programs from other industries, as well as surprisingly low employees. As
a result of the restrictions to labour migration, the industry may lose as employees are forced to
locate housing within easily accessible of their employment thus creating a failure in regards to
labour and creating market imperfection.

Economic limits, along with greater upfront expenditures for shareholder, imply that
potential purchasers may postpone completing a home acquisition in need to accumulate
sufficient funds for a security. Increasing lending capacity (through greater entry to mortgage
loans and negative interest rates) may have led to people opting to invest more income on houses,
rather than greater salaries, according to this analysis of a range of conventional and non-metrics
 London Housing Market 6

of accessibility (McAllister, Shepherd and Wyatt, 2018). In contrast, a variety of demographic

and socioeconomic factors in the London market may have raised demand for property, driving
up the value of desired and well-located home that is in short supply. After looking at the possible
weaknesses and dangers to London's housing industry that may be connected with rising
interested rate and stricter loan economic circumstances, the impact of these larger socio-
demographic characteristics and the effectiveness of a resource constrained.
Housing market weaknesses and hazards in London Home values in London are growing
in actual fact and look expensive in comparison to lengthy patterns on certain metrics, but remain
within reach on others due to relatively low borrowing rates and/or additional streams of money.
This might expose the London industry to the possibility of a pricing corrective, especially if
financing rates increase or availability to credit and various sources of revenue slows.
Vulnerability to fluctuations in loan rate on mortgages fast home price increases, fueled
by simpler and convenient borrowing, may result to increased degrees of indebtedness and a rise
in the proportion of families sensitive to interest’s rates fluctuations if not accompanied by
significantly higher wages. As a result, the economy's capacity to resist subsequent crises may be
harmed (Fingleton, Fuerst and Szumilo, 2019). The Bank of England reported 67, relying on a
yearly poll of 6,000 UK homes, that a raise in interest rate from the present low of 0.5 percent to
2.5 percent would nearly quadruple the share of people failing to maintain their loans (as those
financed by a variable rate would face higher monthly costs of repayment) which majorly
contributed to the failure of financial services and products.

UK government economic policies

Over the previous 40 years, the UK's budget dilemma has gradually worsened.
Legitimate housing costs and, perhaps, real private rental housing have risen higher in the UK in
comparison to any other OECD nation, in contradiction to true earnings (Jackson and Jabbie,
2019). Younger and lower-income families, in particular, strain to get their foot on the property
market. Not unexpectedly, significant structural reforms developed in the past, particularly those
introduced in recent years, reflect the stylised reality that housing affordability has been a top
issue for voters and politicians of all shades. Below, we'll go through some of the important
initiatives that the UK has put in place to solve the affordability challenge. We explain their goals,
as well as their advantages and disadvantages.
The concept of social housing has without a doubt helped the less fortunate households
 London Housing Market 7

and individuals in being able to get appropriate homes in comparison to what they might be able
to afford in the absence of such assistance. It's hard to say if government expenditure on welfare
accommodation in specific regions was beneficial as a strategy instead of providing a similar
amount of funds straight to low-income families and disadvantaged individuals (Cheshire, 2018).
Generally, the answer is that proactively aiding folks is a more effective strategy to attain the
desired outcome. Market forces are subdued, and incentives to those who enhance demand may
not really contribute too much new private development of homes, because the planning system is
rapidly not reacting to price signals practically all over the state. As a consequence, what would
normally be a wise strategy in the situation of market forces, are working properly may eventually
wind up being a proposal doomed for failure.
The strategy authorizes social rentals to purchase their houses being at a extremely
discounted rate, concluding towards the conversion of some of the greatest social residential
properties from rented to own. The Right-to-Buy Act is an essential aspect for the explanation of
the vast increase in homeownership from 1980 to 2002 (Canepa, Chini and Alqaralleh, 2020). It
may be advantageous to increase ownership rates. This is especially true in areas when supply is
limited. Conversely, there is indication that (leveraged) homeownership has a negative impact on
the labor market and entrepreneurship. Consequently, it's rather vague whether the Right-to-Buy
subsidy for housing association tenants— that basically favors few lower-income families at
random—is socially justified.

Second, the legislative systems puts extensive expenditures over the taxpayers. This is for
the reason that housing associations are financed by the state, they must presumably be
compensated for the losses they incur. Lastly, although expanding Right-to-Buy could be
beneficial for certain individuals of housing association rentals, this approach would not resolve
the state’s affordability issue for the majority public. Hypothetically if housing associations'
capacity to finance new construction is unaltered, it would probably worsen the situation
(Hamnett, 2018). This is due to two aspects: To begin with, changing from a housing association
renter to a proprietor has no impact on total residential demand or supply, and hence does not lead
to the construction of more housing units. Second, a person who is now an owner has a higher
encouragement to resist new building compared to a similar individual who is a renter. In the
totality, this will make developing new houses much more challenging and, as a result, the
housing affordability situation will worsen (Alqaralleh and Canepa, 2020).
 London Housing Market 8

In 2013, the so-called "Help-to-Buy" programme was implemented. The strategy's

objective was to enhance home demand, and it was without a doubt the previous association
government's hallmark housing programme (Bramley and Fitzpatrick, 2018). The Help-to-Buy
programme is with the inclusion of four aspects: equity lending, mortgage insurance, common
ownership, and a "new buy" programme allowing purchasers to get a freshly built house with a
5% deposit. The provisions legislatures held the perspective that the increased demand would lead
to additional houses being constructed and an increased rate of homeownership.

House-related taxes could have a significant impact on housing affordability, particularly

in areas with strict regulatory requirements. As high (lower) tariffs in supply-constrained
locations are likely to be capitalized into lower (higher) property values, programs that promote
housing demand, such as Help-to-Buy, have the primary impact of pushing up home prices rather
than increasing supply. According to Jacobs and Manzi (2020), as a result, these demand-driven
programs may be a waste of government funds at best.

It's critical to emphasize that improving the planning system does not imply dismissing it.
The control strategy, on the other hand, should not be only oriented on limiting housing (and
other) construction to frequently unappealing brownfield lands in undesirable places (Nazir et al.,
2020). Rather, the fundamental assumption should be that changes should represent market
failures in order to ensure that land-based public goods are protected.

Conclusion
In Europe, the United Kingdom is the top nation in terms of house ownership, and
property is the most important source of wealth in the country. The UK's fundamental economic
architecture is solid and the employment market is active, according to the Chartered Surveyor's
annual review of the housing market. It is apparent that the UK property market will continue to
suffer the consequences of its current state of depreciation (Best and Kleven, 2018). The current
credit crunch is continuing to undermine investor confidence in the financial markets.
 London Housing Market 9

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