Market Failures and Remedies in Housing

It is interesting to think through which types of market failure apply to housing, and to what degree and what this might imply for intelligent, well-targeted policy interventions. Table 3.1 attempts to do this in a systematic way.

Table 3.1 Market failures, application to housing and policy responses



Does this apply to housing?

Housing policy responses

Many sellers competing

Generally, a competitive market. Possible local monopoly of land Possible market dominance by particular land/housing producers. 'Monopoly' of Social Rental housing (SR) by government housing authorities

Government inquiries (e.g. competitiveness of industry). Deregulation of finance sector (e.g. mortgages). Stock transfer and promotion of 'third sector' nongovernment housing authorities e.g. Housing Associations (HA's)/ Registered Social Landlords (RSL's) (Britain)

No increasing returns to scale

Some scale economics in SR provision. Indirectly via infrastructure

Grant rates.

Encourage social landlord mergers. Development Corporations (to facilitate large scale housing and urban development)

No externalities (spillover effects)

Public health hazards of slum housing. Neighbourhood dis-amenities of rundown or congested areas. 'Obesogenic' environments

Regulation of minimum housing standards (fitness, multi-occupancy).

Subsidies (renovation grants). Area renewal schemes. Planning 'sustainable' neighbourhoods

Not public good (non-excludable, non-rival) Homogeneous product - Supply can respond

Public spaces in residential areas. Crime and disorder problems

All housing distinct, spatially fixed. Wide price/rent variations. Inelastic supply, price booms/slumps

Design guides. Laws of tenement. Localised housing management Planning policies for new housing, including overall numbers, location, type. Tax and interest rate policy. Public/subsidised provision of SR and low-cost home ownership products


Table 3.1 (continued)



Does this apply to housing?

Housing policy responses


Information— Quality of product— Availability of alternatives— Foresight re future conditions

Structural condition & future maintenance of housing. Mortgage/financial products. Financial safety nets

Information packs (condition report of housing). Professional codes. Information and Advice services. Mortgage Codes and Regulation. Insurance products. Housing Allowances. Financial education

Acceptable distribution— income/

wealth—specific outcomes

Widening inequalities of income. Housing fuelling wealth divergence. High consensus re minimum housing standards

General tax and benefits systems.

Housing Benefit. 'Affordable social rents'. Subsidies for low-cost home ownership products. Needs-based allocation and homeless persons legislation

Source: the authors

Nearly all categories of market failure apply in some degree, but some are more important. However, in housing the dominant arguments tend to be to do with distribution (equity/fairness and minimum standards). As inequality has widened in recent periods (especially in the USA and to some extent in the UK), affordability problems appear to have become more intractable, and this concern about equity or fairness in the housing market has been reinforced. However, the types of interventions governments are willing and able to make in the housing market are changing.

Externalities (especially public health) were historically important. Today, they are rather more marginal in most developed countries, although there is renewed interest in the health effects of neighbourhood environments through mechanisms like active travel and social interaction (part of the wider ‘social sustainability’ concept in planning). The supply response argument was important for many nations historically, post-World War I and World War II; but forgotten about post-1975. In countries such as the UK, where levels of housebuilding flattened or fell during the 1980s or 1990s, supply was then dramatically rediscovered with the Barker review in 2004 and is a continuing priority issue in England in the 2010s (discussed further in Chap. 5). Information problems are of growing importance, particularly in the area of mortgage finance, as underlined by the recent crisis (especially the US sub-prime debacle) as well as earlier episodes.

To sum up, housing is not just another commodity, best left entirely to the market; even though it is not fully or largely part of welfare system either, in contrast with healthcare and education. Governments are likely to concern themselves with a wide range of potential market failures relating directly or indirectly to housing, although the forms of intervention will often be indirect and regulatory, or reliant upon better-informed consumers. The particular interventions which may be effected through planning are discussed further in Chap. 4.

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