First time buyers in their early 20s are at a great disadvantage in buying a house. House prices have risen much faster than incomes, making it very difficult to get on the property ladder. This phenomena has caused a rising wealth generation gap, between those who bought houses 20 years ago, and those who are seeking to buy now.
Arguably, the government can and should intervene in the housing market to try and create more affordable housing. There are various options they can try.
1. Increase Supply. If demand is rising faster, the obvious solution is to build more houses. The problem is that many local councils resist the building of new houses. They want to protect green belt land. Also many people have a vested interest in keeping house prices high.
2. Reduce Demand. The government could try to limit demand through taxes. In particular, the government could target buy to let investors and people who buy second houses. However, these options are likely to be difficult to implement and unpopular with some people.Preventing immigration would help reduce house price growth, but, there are many other issues to consider as well.
3. Build More council houses. Council housing has gone out of fashion since Mrs Thatcher encouraged councils to sell them off in the 1980s. However, the problems is that there is now a real shortage of affordable housing.
4. Government Assistance to buy houses.
For certain key workers the government offer mortgage subsidies and joint purchasing agreements. However, these don’t really tackle the underlying problem of expensive house prices. They merely give some people a better chance of getting on the property ladder.
5. Maximum Prices
In theory the government could set maximum prices for house prices and renting. For example, they could say 2 bedroom flats in Manchester should not be above £130,000. However, there are real problems with using this as a solution.
- It is very difficult to determine what the maximum price should be. It would vary with each area.
- It would cause demand to be greater than supply. If house prices were lower there would be more people wanting to buy than supply was available. Therefore, there would be waiting lists. Some people would be encouraged to buy on the black market and pay money on the side. A maximum price doesn’t deal with the fundamental problem of lack of supply in UK housing.
Also, there is a danger that if the government seek to reduce house price it could cause serious economic problems. A fall in house prices would reduce consumer spending and could contribute to a recession. Rather than reducing house prices the best option may be to limit future house price inflation through increasing supply.
Also, it may be the case that the government do not have to do anything to reduce house prices as they are likely to fall anyway. – See: House Price fall
