Market failure occurs when the free market leads to an inefficient allocation of resources. Arguably, the housing market leads to various types of market failure such as environmental costs of new houses, inequality from rising house prices, and social problems arising from lack of sufficient good quality housing.
Types of Market Failure in the Housing Market
- In particular we have a situation where many young people are struggling to be able to afford to buy housing creating inequality. The ratio of house prices to income, is very high, meaning many young people are unable to buy.
- Housing could also be seen as a merit good. If housing is of a poor standard (e.g. overcrowding, insanitary conditions) it can contribute to social problems such as rioting, crime and vandalism.
- Positive externalities in the housing market. Good quality housing can have positive externalities, such as: improved public health, reduced crime, reduced heating bills and air pollution. See: positive externalities in the housing market
- Price Instability. Because supply of housing is inelastic any change in demand causes a big change in price. Many are now predicting house prices could fall, although at the moment, prices seem to just be stagnating.
- The housing market has a significant impact on the wider macro economy. Falling house prices could contribute towards a recession.
- Geographical immobility. Due to divergence between house prices in the north and south, it can be difficult for workers to find suitable accommodation in London. Therefore, this leads to a shortage of key skilled workers in areas of very expensive house prices.
- Environmental factors. Another issue in the housing market is that building new houses on green belt land can lead to a loss of precious green spaces. There are negative externalities to building houses. However, this market failure is a contrast to the lack of new houses built leading to higher prices.
