UK- The Third Most Expensive Housing Cost in Europe

Based on an article written by Mark King [ http://www.guardian.co.uk/money/2012/jul/19/uk-housing-costs-third-highest ], dated 17 July 2012 from the The Guardian,  the housing cost in the United Kingdom  has became the third most expensive place in the EU after Demark and Greece. Britons are paying 40% of their income just on housing costs and spending even more when adding up with mortgage payment and cost such as utility bills, service charges and tax. They were overburdened with those costs due to the failure of governments prioritise in housing investment.

The housing cost which exceeds 40% of the total household income indicates that the rents are high. In limiting the level of rent paid, the government may set a price ceiling to the housing market, this is known as the rent ceiling. It is illegal when there is a higher charge of price over a specific level. Price ceiling which sets above the equilibrium price will certainly has no effect as there is no constraint in the market forces. Hence, no conflict between the law and the market forces. Alternately, when the price ceiling is set below the equilibrium price, the effects on the market are great. The application of price ceiling attempts to prevent the price from regulating the quantity demanded and supplied. As a result, conflict occurs between the force of the law and market forces.

When rent ceiling is set below the equilibrium price, it will lead to a housing shortage, increased in search activity and trading in a black market. A shortage of housing occurs when the rent is not in equilibrium, whereby the quantity demanded of housing exceeded the quantity of housing supplied. The limited quantity available is the quantity supplied and this availability will usually be allocated to those frustrated demanders who had spent time on the search activity. On the other hand, for those who did not opt for search activity will be forced to look into expensive private rental sector.   

It is common that during a housing shortage, people tend to spend time on surfing the internet to check for alternative available before making a decision. The time spent on looking for someone with whom to do business with is known as the search activity. By using this technique, the house owner will somehow benefit from the chance to secure a room or a house but the opportunity cost increases. It covers not only the price but also the value of the search time spent finding the good and other resources such as phone calls, automobiles , and gasoline which could have been used in other productive ways. The negative effect of increased search activity is that the cost which had been spent might be ended up more than the full cost of housing than it would be without a rent ceiling.

The third consequence of rent ceiling is the encouragement of illegal trading on a black market, an activity which caused the equilibrium price exceeds the price ceiling. It usually applies to rent-controlled housing and to other markets as well but in the housing context, the enforcement of rent ceiling result in frustration on the renters and landlords to seek for opportunity to increase the rent. The level of the black market varies according to the enforcement of the rent ceiling. A loose enforcement will result in black market rent closer to the unregulated rent, while a tighter enforcement will result in a black market rent equal to the maximum price that a renter is willing to pay.

When price ceiling is set below the equilibrium rent, the housing service is said to have an inefficient underproduction. Here, the marginal social benefit exceeds its marginal cost and there will be a deadweight loss which affects the producer surplus and consumer surplus.

The deadweight loss arises as a consequent of the less quantity of housing supplied compared to the efficient quantity. This is shown in the grey area in the graph. The consumer surplus shrinks to the green area while the producer surplus shrinks to the blue area. The red area indicates the potential loss resulting from the increased activity search activity and the consumer has to bear for it. While the full loss from the rent ceiling covers the sum of deadweight loss and the increased cost of search.

Although the application of rent ceiling might be inefficient, it can achieve a fairer allocation of scarce housing in terms of equity. According to the fair rule view, anything that impinged the voluntary exchange will be unfair. But according to the fair result proposed by John Rawls in his Theory of Justice, a fair distribution or outcome is the one that makes the poorest person as well off as possible. Therefore, the fairest outcome is the best to allocate the scarce housing to the poorest. To test on the achievement of the outcome, the blocking of rent adjustments itself does not eliminate scarcity, while other mechanisms like: lottery which allocates housing to those who are lucky, first come-first serve basis and discrimination based on friendships, family ties or other criteria such as race and ethnicity can be considered as fair.

No doubt that this policy meant a lot to assist the poor, but when we take into considerations on other factors such as: limitation on the freedom on citizens, the harm arises far more to the citizen than it helps and the low benefits to the citizen, the rent control should be removed for the best interest of the majority. In regards of the poor, the government should come up with new plans such as new affordable houses with a higher subsidized to enable to accommodate the poor.

                                                                                                                                          by Patricia Lee