Market failure in housing
The housing sector does not always operate in an optimum way. Indeed there are many economists who believe that the housing sector is a good example of numerous market failures - we examine this in this section.

Possible causes of market failure in the housing sector:

Homelessness:
Measuring the true scale of homelessness in the United Kingdom is extremely difficult. The Shelter web site provides some evidence on how many people are classified as homeless. Homelessness is the most acute indicator of housing shortage. In 1999 a total of 166,760 households were recognised as homeless by local authorities in England. This represents over 400,000 people. This figure is only the tip of the iceberg. It does not include most of the 41,000 people who are living in hostels and squats, or the 78,000 couples or lone parents sharing accommodation, as they are unable to afford to set up a home on their own. People from minority ethnic groups are over represented among homeless households. In 1998, 59 per cent of households accepted as homeless by local authorities in inner London were from ethnic minorities. The Government estimates that at June 1999 around 1,600 people were sleeping on the street on any one night. In 1999, Shelterline, received 38,000 calls from single homeless people. Most single people have no priority under the current homelessness legislation. Low level of housing also contributes to social exclusion and growing levels of crime and vandalism which is a negative externality.

Poor Quality Housing - Inequality and Negative Externalities

The poor quality of much of the UK housing stock inevitably has an effect on the standard of living and quality of life of many thousands of people. There is growing evidence that poor housing contributes to a decline in average life expectancy and increased incidence of illness. This imposes extra costs on the National Health Service and Social Services. To these external costs we can add the impact of poor housing conditions on the educational attainment level of hundreds of thousands of school children.

Market Failure and Inefficiency in Housing Transactions

The system of home buying and selling in England and Wales is one of the slowest in Europe, it causes misery and frustration for many home buyers and sellers, and it leads to many transactions falling through after an offer has been made. Previous research has shown that it takes around eight weeks to get from offer acceptance to exchange of contracts, that 40 per cent of both buyers and sellers are dissatisfied with the process, and that 28 per cent of offers fail after acceptance

Thus as above we can see that the market has failed as there is a underallocation of resources. Housing is a merit good and thus there is always under consumption of the goods. Thus government have to step in to help in increasing their consumption. Firstly, the British Government can provide subsidies for building houses but however this has been quite low in recent years. This will in bid that with a lower production cost, supply of the houses will increase thus causing a surplus which will lower the price. The lowered price will then attract people to purchase a house which will in the end solve the market failure. However, it will bear alot of burden on the government expenses, and in order to fund the operation they would have to increase taxes which has detrimental impact on the economy and the society.

Another way that can be done is throught setting a price floor. The aim of this is to reduce the price of rented houses, however this could result in a shortage of houses in the rented sector and the degradation of the quality of the rented houses as there is not much profitability from rental of the houses.

Freddy