Solutions to Problems of Housing Market

The UK housing market has numerous problems:

1. Long Term shortage of Housing
2. Volatile Prices - Booms and Busts in prices. People get carried away in booms leading to painful periods of correction.
3. Shortage of Mortgage Lending.

Policies Which would Help.

1. Encouraging Use of Empty Homes. There are an estimated 1 million empty homes to help dealing with long term shortages without having to build unpopular ‘eco towns’. This could involve greater tax breaks for rennovating empty houses. It might involve higher taxes on empty property giving landlords an incentive to rent and make use of them. (see: problem of empty homes)

2. Increased Supply. In the long term the government still need to actively promote increased supply of both rented and owner occupied housing. The current crisis has led to a sharp fall in house builds, but, when the market recovers we may find again shortages of supply. The government need to look at high density housing in existing population conurbation’s. Without adressing the housing shortages, house prices and rents will remain very high reducing people’s living standards. (why is there a housing shortage?)

3. Mortgage Security. In the short term, the most pressing problem facing the housing market is how the mortgage sector has dried up, leading to a dramatic fall in housing sales. In the short term, there is a strong argument for the government to offer mortgage backed securities for new home buyers and the wider property market. This extra liquidity will hopefully help regain a sense of normalacy in the mortgage sector.

4. Buy / rent Schemes. There are some mortgage schemes for key public sector workers to get on the property ladder. These could benefit from being expanded to help young people buy non risky mortgages and buy a house. This could involve part rent and ownership schemes.

5. Fixed Rate Mortgages. The volatility of the housing market is a difficult issue to solve. Greater extension of fixed rate mortgages of 10 years or more, would help create greater certainty in the market and encourage long term security; it would avoid problems like in the early 1990s when interest rates unexpectedly rose to 12%. The problem is that there is only so much the government can do to encourage take up of fixed rate mortgages.

6. Tax on Second Homes. Greater stamp duty on second homes would help reduce demand in holiday hotspots; it could also enable lower stamp duty for first time buyers.

The problem with the UK housing market is that there are several problems both short term and long term. We have a situation of rapidly falling prices and yet, there is still acknowledgement of a shortage of supply. The more serious problem is trying to avoid booms and busts in the housing market. The difficulty here is that the MPC target inflation rather than the housing Market. This issue could prove more difficult to solve.