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The London Housing Market

· 案例展示

The London housing market had experienced rising prices of properties in recent years and peaked in 2014. In fact, the real house prices instead of the real incomes increased faster in the London than other major cities in OECD countries over the last forty years. Then, year 2016 witnessed another peak in the housing price of London but now the market is cooling down (Dianati et al., 2017). In early 2016, the annual price growth was 14.8%, after which the number of transactions reduced and the price growth slowed down. In this May, the housing price growth rate reached its 5-year low. The average housing price in London in June 2018 was £475,000, a 1% decrease on one year ago (Dianati et al., 2017). This report will examine the supply and demands functions in the London Housing market. Meanwhile, it will also evaluate the roles of financial systems and central banks in the overall economy. Based on the analysis, this report will provide potential solutions for policy intervention to tackle the market failure.

2.1 Demand and supply

London experienced strong growth of migrations and economic activities in the new century. Meanwhile, employment also increased at higher speed than predicted by policymakers. The growing employment opportunities favor high skilled workers and thus result in more in work poverty (Wills et al., 2009). Poverty and inequality are still severe issues in London. While high income people move into inner areas such as Tower hamlets, lower income population move into outer suburban areas. Meanwhile, the changes to housing benefits with capped local benefits to rents and caps on social security benefits further made the problem worse as mixed income households could not affordable the house rate.

Facing the increasing population and employment, the supply of housing did not keep up with the rising demand for housing, especially affordable housing. Since 2006, the dwelling stock increased only 8.5%, only 65% of the growth in numbers of household and 50% of the growth in population during the same time window (Scanlon et al., 2018). The increasing pressures have influence on the housing prices in London.

Moreover, there is gap between the rising house price and the supply. A number literatures blame the insufficient supply to failure in planning and argue that planners do not release adequate lands. However, planners claim that the number of land released is far more than the land developed (Taylor et al., 2015).

UK housing supply and house prices. Borrowed from Gallent (2015)

Some blame speculative land banking for the shortage of land and housing in London, noting that some developers or non development firms just hold the lands without really initiating any development and waiting for gaining from the speculative trading of lands (Edwards, 2015). However, since the land market is not transparent, it is difficult the evaluate the reliability of the claim. The imperfect information in housing market also makes the market less efficient since normally sellers have more knowledge than buyers. Additional costs incur as people want to secure more accurate and reliable information. Moreover, the housing market in London is considered to be less competitive due to increased consolation in the house building industry. Due to decreased competitive pressure, developers have more decision making power to maximize their profit margin rather than the volume for output and housing units (Adams et al., 2009).

2.2 Elasticity on demand and supply

The inflexible planning system in the UK ignores the signals in the market and did not keep up with the socio economic changes. The inelasticity of supply has been blamed as one of the major causes of the high house prices and its high volatilities. Meanwhile, the elasticity of demand to changes in prices is also limited by the shortage of developable land and geographic constraints. For example, in the developed areas, for example, the Greater London Area, there is not sufficient developable land (Hilber and Vermeulen, 2015). Additionally, the supply is also limited by the topography, which also constrains the housing prices in rugged locations. As a result, the physical constraints also contributes to the inflexibility of the supply of housing (Hilber and Vermeulen, 2015).

In the UK government report in 2011, it noted that housing is essential to the mobility, the health, and wellbeing of the society. The quality and choice of housing have impacts on people from early ages and homes make up of 50% of the household wealth. However, the housing market in London is experiencing market failure in recent decades. An optimal market has competition among suppliers and there is perfect information flow among buyers and sellers. Meanwhile, the final distribution of scare goods is equitable. However, in London, the output of new housing and the household growth does not match, which prevents Londoners from building household and results in overcrowding. Meanwhile, a prevailing problem is the shortage of affordable housing and quality housing. The number of social renting and the public housing is in a declining trend in the last three decades. Due to the decrease of funding from central government, the number of new homes by local council dropped significantly. During the Decent Homes Program, which aimed to move all social tenants to decent home with minimum standards, the number of social housing was further reduced. However, the program did not really improve the housing conditions of Londoners. The declining number in the waiting lists for social home only resulted from the changes in rule which favored certain groups of people. By 2011, the 25% of householders lived in private rental sector compared with 24% of the households lived in social renting. Since London has highly deregulated Private Rented Sector, functioning rental controls allows for the stalled gentrification. However, the weakening rental controls will contribute to higher gentrification and social rental housing is the buffer against gentrification. As a result, the reduced number of social rental housing actually weakens the functioning of the buffer to combat with gentrification.

Another sign is the increasing speculative investment. Facing increased number of service sector labor force, the city lacks affordable housing. While developers hold large number of land with planning permissions to build a large number of homes, they are holding land or buildings for speculative purpose. The financialization of economy is featured by a heavy focus on housing and property with credit inflated prices (Edwards, 2016). Meanwhile, housing asset and tenancies are regarded as a primary means to secure funds. While housing and property leads to vast profitability, it comes along with reduced wages. The house prices in London is sensitive to rising interest rate since buyers take out mortgages as a high portion compared with their income. The chart below shows the affordability of housing in London, where the ratio of median house price to median earnings is more than 10 (Edwards, 2016).

Chart Ratio of Median House Price to Median Earnings in London and England

Currently, the increase in housing prices negatively influence the viability of firms in the city. Firms have to increase wages in order to attract employees to come and work. Meanwhile, the rising rents reduce the household savings and reduce the money for investing in other industries and sectors in the economy of London. Meanwhile, the cash flow tends to be put into the housing market, which has already been highly inflated, eating out the funds for new investment opportunities for non housing firms. As a result, the economy relies largely on the increase in housing prices. The UK government also tends to favor theses ultra high-net-worth overseas individuals with looser legislation to prevent excessive investment. These overseas investors make investment in housing and property in London rather than just for accommodation or purchasing for their children. At the same time, London is also dominating the buy to let investment market in the UK. In London, the buy to let makes up of around 50% of the new built properties in the city (Federation, 2014). As of 2011, the number of owner occupied households in London was below half of the percentage level in 1981. If the housing increasingly become an investment toll rather than accommodation to people, this will also influence the private rental sector. The private rental sector is highly deregulated and is expensive. The private rental sector has experienced rapid growth in the last few years and more householders live in private rent sector compared with people who live in social renting. The explosion of letting agencies and landlord practices make housing more insecure. Based on the study by Copley, during the last few years, the complaints made by private rent sector tenants increased by around 50%, such as disrepair, harassment, and others (Copley, 2014).

Moreover, recently, Brexit leads to uncertainty concerning the trend of housing market in London and negative affects investor confidence. According to Royal Institution of Chartered Surveyors (RICS), recent cycle to complete a property sale has expanded to 19 weeks. Meanwhile, the measure of inquires decreased to negative 11% (Coppola, 2018). Meanwhile, the falling number of net migrations from the EU has significant influence on the demand side. One of the policies to reduce the shortage of housing in London is the new higher stamp duty. The falling prices of housing in London is also the consequences of new higher rate of stamp duty. Thus, the buy to let investment becomes less attractive to investors (Strauss, 2018).

3.0 Policy intervention to correct market failure

To address the market failure in housing price in London, the government can take measures from the following aspects, including housing planning, taxation and subsidiaries, and provision for affordable housing.

In terms of housing planning, the planning system needs to be more flexible. Currently, the London housing plan has outlined the requirements and plans for development of housing in the city for the next few years. In the plan, it sets out he targets until 2025 according to the GLA 2013 Strategic Housing Market Assessment. The plan recognizes the increasing population in London and assumes the population will increase to 2 million in 2036. Based on the assumption, it predicts that by 2036, the number of households will increase by 1 million. As a result, the plan aims to provide 420,000 additional homes per year (London, 2016). As a result, the planning system will grant corresponding planning permission to address housing problem. Nevertheless, the implementation of the policy is still questionable and problematic. How to achieve the goals and targets remain the center of the question.

Besides systematic planning, stamp duty might also be a solution. The city introduced new higher stamp duty in 2016 on the second homes, equal to an additional 3% tax on the purchase costs. It can reduce speculative investment and overseas investment. However, the policy is blamed for reducing mobility. According to the study by Hilber and Lyytikäinen, through empirical findings, it is suggested that the introduction of stamp duties lead to higher misallocation of dwellings and thus reduce the welfare on the society as a whole (Hilber and Lyytikäinen, 2017).

Concerning the subsidiaries, there is the policy of help-to-buy, which aims to promote house supply. However, the policy aiming to mitigate the problems actually worsen the situation. The policy of help to buy is believed to contribute to the increased housing price. The scheme targeted at using equity loan to first time buyer and mortgage guarantee to existing houses to stimulate demands of housing (Hilber, 2015). According to the study of Dorling, the scheme encourages ordinary people to run the risks and pushed the housing prices to rise (Dorling, 2015). The policy, thus, instead of encouraging more demands for housing, actually drives the housing price further.

The housing benefits is also a solution to boost housing, which intends to support the costs for rented accommodations. However, some critics pointed out that the policy can encourage housing as an investment and subsidize landlords for more gains with the money from taxpayers (Edwards, 2015). The incentives are believed to bring one off wealth windfall to a certain group of people in the economy and are not repeatable. Meanwhile, these warfare incentives lead to new inequality and result in large amount of debts in the economy (Montgomerie and Büdenbender, 2015).

Another solution is to build more homes, especially affordable homes. It is estimated that the number of home to build should match the rising population growth in London.

Chart The minimum number of homes need to build each year (Shelter, 2014)

In 2016, major of London puts a proposal to increate eh supply of low costs homes in the city under City Hall guidelines and sets 35% affordable homes as a proportion of total homes developed by private developers in a deal with developers (Booth, 2016). This intervention is the first step of the long term strategic goal of increasing the number for affordable homes and achieving the 50% from the overall economy. Meanwhile, he proposed to provide funding for more than 90,000 affordable homes over the next few years to create a mix of low cost rent, sharing ownership, and London living rent based on average incomes (Booth, 2016). The proposal also brought some concerns. While it can increase the supply of affordable houses, it cannot guarantee whether the distribution is equitable among people.

4.0 Conclusion and Recommendations

This report discussed the functioning of demand and supply of London housing market with particular focus on demand and supply and their elasticity to price. Meanwhile, it also investigates the signs of market bubbles. The mismatch between supply and demand leads to the failure in market. The inflexibility of planning system, speculative banking, constraints on land policies, lack of competition in the market and lack transparency all contribute to the market failure. While there are several policies in place to address the problems, they are not free from flaws.

To make the intervention more effective, instead of designing polices that increase welfare losses, the policies should provide genuine incentives to encourage local authorities to release more lands for developing homes for residual purpose. The stamp duty, for example, can be replaced with an annual tax on the value of the housing and tax on the value of the lands, for example. Meanwhile, policy makers should consider the externalities that come along with the policies and consider the equality issues and the implementation of such policies. More importantly, instead of coming up with individual policies, the solutions should be organized under a systematic framework to address the housing problem in London. Policies should consider both the demand side and the supply side of the problem. Each policy should not be independent but should be linked with each other to form the framework. As a result, the policy making process demands more discretion of policy makers with more comprehensive understanding of the problem and the underlying causes.

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