Posts Tagged ‘free market’

I am a proponent on the free market. That doesn’t mean I am a hardcore economic libertarian that thinks the state should keep its nose out. Far from it. I think the free market works best well in a strongly regulated environment that forces companies to provide a high level of service and prevents them from gaining a monopoly.

Housing is a tough one though. House prices continue to go up. Why? One answer is, that people keep buying them. Getting into more and more debt. Which, as we saw in 2008, can only go so far. Yet the property market continues. While the rest of the world burned, house prices never really dropped that much.

Another reason is that the government know that home-owners vote, and so continue to push out policies that prop up house prices. As I have written about before, any consideration of the help to buy scheme quickly reveals it as a trick to help the middle class. Rather than forcing home-owners to lower prices to those affordable to first-time buyers, it forces young people to take on even more government-sponsored debt while allowing the home-owning class to extract their silver.

The problem with the housing market though, is that there is no opt-out. With consumer goods, if they are ludicrously expensive, you just buy something else with your money. Housing is not like that. You need somewhere to live. While house prices may be irrationally high but we face the same problem that those who said they knew the 2008 financial crash was coming. Just because you know it to be the case, does not mean you can stay solvent longer than the market can remain irrational.

Another reason that the free market fails with regards to house prices is that people have stronger non-financial considerations. They want to live near their friends and families for example and have jobs tying them down to locations. In a free market, everyone would move to Darlington to enjoy cheap, spacious houses. Yet people continue to rent hovels in London for £2,000 a month because their connections keep them there. They are trapped in a restricted market.

In contrast, an increased investment in council houses could help fix the market. Having council houses with reasonable rents could provide a genuine alternative to buying or renting from private landlords, forcing the private housing market to compete for customers on a truly free market.

Recently a new report by Shelter suggested that 80% of homes were unaffordable to most families. Government intervention on this issue has failed us. Perhaps it is time for a free market solution?

Firstly, the government’s “Help to Buy” scheme is not helpful. It allows people to take 95% mortgages by allowing the banks to make less risky mortgages and the government paying the rest. The problem with this is that it allows people to buy homes they can’t afford.

The example of the Help to Buy website shows the government adding in £20,000 to the £5,000 deposit the buyer has, thus allowing them to buy a £200,000 house. But they cannot afford a £200,000 house. Based on the deposit they are putting up they can afford a £40,000 house. However, state intervention then allows everyone to charge £200,000 and have buyers for them, thus house prices go up to way beyond what they should be.

Secondly, the banks are willing to take large risks on mortgages because they know the government will bail them out if they get into trouble. Thus they can take huge risks, get rich when times are good and make the tax payer pay when times are bad. Who wouldn’t do that?

The government should stop doing things to make this huge prices affordable and actually do the opposite – making them unaffordable! Thus the free market would then bring prices down.

This, not propping up unaffordable house prices, is where state intervention would be useful. In order for the free market to function effectively you need to ensure there is liquidity in the market. This can be achieved by making sitting on second homes unaffordable.

Leeds City Council has already taken steps to do this. They have revoked council tax discount on empty properties and after two years you even may a premium of an extra 50% (you pay 150% of the normal council bill) to encourage you to sell it. Similarly, as I wrote about in 2012, you could just ban people from buying second homes.

Ending the state-sponsored propping up of house prices and introducing further measures to add liquidity to the housing market could then allow the free market to bring house prices down to a reasonable level.

Obviously this is a topic that most people will have an opinion on, so I would love to hear why I am wrong (on which I expect there will be some good arguments).