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The Rise In House Prices Economics Essay

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Published: Mon, 5 Dec 2016

The occurrence of things always produces a side effect, but it is not the right plan entry cost – this is externalities.Soaring prices have far exceeded the British people’s actual purchasing power. With the rise in house prices more and more people become homeless. So rising house prices to the society will lead to kind of social influence to people. The following will use economic externality theory to analyze and discuss solutions. About this easy, firstly it will introduce the externalities theory, and then it will talk about the negative externalities of house price rise, thirdly, it will discuss some government interventions to negative externalities.

Externalities are common in almost every area of economic activity. They are defined as a third party arising from the production or consumption of goods and services for which no appropriate compensation is paid (“What are externalities?”, n.d.). In a transaction, the producer and consumer are the first and second parties, and third parties include any individual, organization, property owner, or resource that is indirectly affected by the transaction (“Negative externalities”, n.d.). A benefit enjoyed by a third-party as a result of an economic transaction is called a positive externality; while cost suffered by a third party as a result of an economic transaction is called a negative externality. For example, two companies merging can lead to higher share prices and bonuses for an employee, which is a positive externality. On the other hand, a merger can lead to a competitor out of business, which may result in layoffs, and is therefore a negative externality. For this reason, share price, employees and competitor are third parties that not directly participate in this transaction.

According to BBC News (2012), in Devon, the number of people or families waited for social housing increased by more than 40% this year. The NHF said in Weighbridge alone, between 2010 and 2011, 960 families joined the housing waiting list, a rise of nearly 40% to 3,390. It also reported a 10% rise in the number households accepted as homeless in the South West in 2010/11 to more than 3,200 from the previous year (BBC.2012). This was because house prices are too high, and rents also are high. Many people can’t afford to buy a house. Result in many thousands of people waiting for a social home. Soaring prices have far exceeded the British people’s actual purchasing power. So rising house prices to the society, brought people what kind of social influence? The following will use economic externality theory to analysis.

As we all know, house also is goods that are general and special. Planning, investment, development, trade and use of a series of links and processes are involved in all aspects of the social economy. The fluctuations of commodity housing price have externality. Because of it is related to everyone’s basic benefits.

Have belonged to own a house is now many young people dream is also facing the most practical problem. But with the rise in house prices, the dream to be getting more and more far, became a luxury. Because a full-time job earned an average of $26000, 260000 Yuan, and the average house price is 162 million pounds, 1.62 million Yuan. In the face of such situation, more and more young people just graduated moved back home and parents to live, to save the rent, and at the same time, hope to get parents funding to buy a house, becoming the “NEET group”. British housing secretary Grant and sharp, who said the current real estate market for young people can be a “terrorist”. Thirty years ago, if more than thirty years old children live with your parents and you are it is “a joke”. Nowadays it already becomes “helpless the facts”.

Rising house prices the most direct negative externalities is to increase the financial risk, increase the produce the change of financial crises. Owing to the real estate assets properties, its price trend must conform to the law of value, end market regulation. When the high house prices deviate from long-term market orbit, permitted in the outside of the law of value, market internal regularity will be in some violent way suddenly broke out, destroy the balance of the market. Specifically is when prices rise to a certain extent will cause the destruction of the real estate market. At this time the bank a large number of real estate credit will be unable to recover and turned bad. Make social capital chain suddenly rupture, along with the domino effect of transmission, other collective economic departments must also will be affected by a significant impact, leading to a deeper level of the financial crisis.

The government must take measures to deal with rising house prices bring negative externalities. In economics to solve externalities measures have three kinds of methods. First measure is a subsidy. Subsidy means the government needs to assess the benefit to society of a particular positive externality. It then sets subsidy rates on those externalities equal to the value of the externality. This increases the benefit to customers and this result is a rise in demand and output and thus fewer externalities are created ( Anderton,2008). In UK, the government tries to use the subsidy makes an income family is able to afford a house. Their major measure is reduced the housing land and construction cost make part of the housing price can be low-income consumers to accept. That is, from indirect subsidies to the purchaser. Is currently implementing the plan, the government in some state-owned wasteland reduces the building land price, at the same time the requirement on the quality of housing guarantee under the premise of reduce the cost of building, in order to make low-income people to 60000 pounds (1 pound $1.80) price buy need housing. On the other hand of, the government provided social housing for low-income consumers. The measures to a certain extent, improve the people can’t afford to buy a house and no room to live. But the social housing is limited, cannot make everyone have a house.

Second solution is a regulation. Any government effort to influence the performance of the economy or the behavior of economic agents, especially firms, this is regulation. The British government is to improve the utilization rate of the mortgage loan allows investors to mortgage-backed securities and asset-backed bonds to the bank of England exchange for the national debt. The government’s efforts to boost the number of loans available by offering banks and building societies cheap funds through the funding for lending scheme, but borrowing remains sluggish, the house prices also rise. Although increased loan availability, better rates as a result of funding for lending and increased confidence play in contributing to a slightly more positive picture for the housing and mortgage markets. Nevertheless, this does not fundamentally solve the problem, just to improve the loan amount, people still can’t afford to buy a house, even to bank loans also are unable to pay off the loan. So the government should take extra measures to make house prices balance. Solve people because the house price high can’t afford to purchase a house situation.

Third solution is a permit that is a legal document giving official permission to do something (Entrepreneur, n.d.). Along with business licenses, you may need to obtain some permits, depending on your business, to show compliance with local and state laws regulating structural appearances and safety as well as the sale of products. In UK, the government does not have any measures to allow in controlling prices of housing. The permit is not suitable use for control of the house price rising.

Rising house prices go against the development of a harmonious society. It brings negative externalities is can’t use money to measure. British house prices of the highest growth are southwest England, house prices have risen by an average 295%; the second is in London, house prices have risen by an average 286 %( STNN. 2012 ). When the financial crisis broke out, the price of the house just to ease the growth rate. According to the nationwide building society, house prices in the UK jumped by 0.6% in October, 2012, bringing the average cost of a property to £164,153 (Osborne, 2012). Nationwide’s chief economist, Robert Gardner, said “Wage growth is still not keeping up with the cost of living and unemployment is still well above normal levels. Ordinary people cannot buy a house, to give them added economic burden on their life caused the difficulty. When people even basic housing has all become sorrow thing, may widen the gap between rich and poor, cause social strata fracture, hinder the healthy development of society. In other words, the house price rising will not only cause people to live in difficulties, at the same time, to social system reasonable construction and national health development is adversely, the produced negative externalities is very serious.

In conclusion, from the deep research on externality of house prices rise is clear to us. An externality is a cost or benefit that arises from production and falls on someone other than the producer, or a cost or benefit that arises from consumption and falls on someone other than the consumer. House prices rising already nearly caused serious negative externality problem. Rising house prices the most direct negative externalities is to improve the financial risk, increase the chances of a financial crisis. Lead to people living in difficult social system, reasonable construction and national health is adverse to the development, for these generated negative externality problem, the government should think of a way to improve and solve.


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