Resolving Urban Housing Problems in the United Kingdom - Essay Example

Resolving Urban Housing Problems in the United Kingdom Introduction According to some disturbing reports published recently by the Joseph Rowntree Foundation (JRF) by the year 2022 there could be a huge deficit between housing needs and the real supply level in Britain. The urban centers in the UK including London and Greater London areas have been subject to the brunt of pressure coming from three major segments of demand - firstly expanding populations within the cities; secondly local immigrants; and thirdly foreign immigrants. The first category of demand imposes a heavy psychological impact on the prevailing housing supply constraints. The second factor of local immigrants coming in to the cities and occupying houses on the fringe of urban centers has contributed in an equally large amount to the problem (O'Connell, 2002. pp.293-307). Finally foreign immigrants have invariably sent the prices of housing in urban centers skyward. As for the supply constraints private builders account for a greater percentage of the total supply while Council Housing is almost defunct. Analysis This paper would place greater emphasis on the supply side problem associated with urban housing problem in the UK. While supply constraints have been responsible largely for the current housing problems in the UK urban sector, some exogenous variables like large scale immigration from the Eastern European countries after the EU enlargement have also contributed in a sizeable measure to them. For instance potential job-seekers from the three first tier countries - Poland, Bulgaria and Romania - have been attracted to prospering urban centers in the UK, including London. Their demand for new houses has driven house prices and rents up thus causing an unprecedented trend in the housing market. The following diagram illustrates the fact that the average rent in London divided into five areas depending on the relative price differentials has been rising considerably fast. The net result is higher house prices and rents caused by falling supply and rising demand. As the diagram illustrates, the supply curve shifts on to the left, thus causing a shortage in supply. The demand curve is assumed to be normal while supply is assumed to be inelastic because in order to bring forth new amount of housing a number of months will be required. Figure 1: Demand for and Supply of free market housing in selected London locations Price (Rent) 1450 1183 The supply constraints can be attributed to five endogenous and exogenous variables, Rising real interest rates The current global economic downturn and financial crisis Falling profit margins The government's efforts to control inflation Rising land prices Real interest rates in the EU in general and the UK in particular has been rising at a steady rate and as a result housing suppliers have been borrowing less and investing less. Coupled with increasing demand the situation has worsened, especially when real interest rates keep on rising housing suppliers tend to increase prices and rents. However the rent might be determined by some other factors as well. For example when Council housing supply is virtually at a standstill private suppliers tend to increase rents unless council restrictions on rents apply (Gibb, 2003. pp.89-114). Secondly current economic downturn and the financial crisis have forced private suppliers to target only a small group of potential buyers as represented by young executives. Young married couples holding executive jobs have driven up housing prices in almost every urban center in the UK. For example London, Glasgow, Lancaster and York all have experienced rising housing prices and rents. The impact of the economic recession has forced private house builders to reduce not only the area of the apartment but also the facilities (Salins, 1987. pp.67). Suppliers tend to make their forecasts depending on the economic trends such as housing bubbles and cyclical demand fluctuations. Profit margins of housing suppliers have been falling both in nominal and real terms. The recent subprime mortgage crisis has led house suppliers to exercise extra precaution. Defaulting buyers have sought to go for secondary mortgages with a view to minimizing installment payments (Vries & Boelhouwer, 2005. pp. 80 - 96). However such efforts have been frustrated by the current economic crisis. In the first instance mortgage lenders like commercial banks have been adopting much stricter lending policies. Coupled with equally strict renegotiation terms and conditions house buyers have been discouraged. Next the government efforts to control inflation have brought about a tight monetary and fiscal policy mixture. For example successive British governments have sought to restrict money supply with marked emphasis on sectoral expenditure patterns. Housing comes under governments' scrutiny very often. Finally rising land prices in urban centers like London have had a negative impact on supply. Private house builders have been forced to make alternate investments in other spheres such as building shopping complexes and multiplexes. Table 1: Average Monthly Rent in London - 2009 Studio 1 Bed 2 Bed 3 Bed Area 1 1331 1779 2604 4165 Area 2 863 1122 1532 1994 Area 3 669 881 1183 1450 Area 4 615 780 1028 1185 Area 5 574 719 884 1038 Source: www.net-lettings.co.uk The above table illustrates the fact that in selected London areas according to their importance monthly rents have been rising in comparison to the past few years (Thomas, 1996. pp.38-52). In fact over a period of one decade rents have risen by more than 300% in some areas. The supply factors discussed above can be made use of to explain the modern developments in urban areas of the UK. For example government decisions concerning housing boil down to its urban housing policy. Congestion and trend control measures apart, successive British government have been concerned about the extension of urban centers. Negative consequences associated with conurbations like greater London cannot be ignored in the long run. Scrolling urban cities in the UK have produced a mixture of problems. Housing is one of them. Inadequate funds at building societies and falling returns on housing related investments are the two main problems faced by suppliers in trying to keep their asset values at a steadily rising rate. The former problem has effectively reduced the amount of competition led price moderation in the housing market (Vliet, 1996. pp.19). Building societies have been known for their positive contribution to the growth of the housing industry in urban areas of the UK. However now they are much less visible in urban centers. Net returns on investments in the UK housing sector have been falling substantially during the past few years. The subprime mortgage crisis has been responsible for most of these problems though a number of other variables also have impacted on the supply side of housing the urban centers in the UK such as the above mentioned supply constraints and the influx of immigrants from Eastern Europe (Norwood, 2009. pp.58). Conclusion In conclusion it must be noted that the current housing problems in the urban areas of the UK have been the net result of a mixture of demand and supply related issues. On the demand side expanding populations in fast growing cities across the UK coupled with local immigration have put a great strain the available housing. Similarly East European immigrants coming in to the UK looking for jobs have driven up prices and rents of apartments. On the supply side the steadily rising real interest rates, the current economic downturn, rising land prices, falling profit margins and government's inflation control policies all have contributed in large measure to the current housing problems in the UK. Further a number of other factors such as decreasing funds of building societies and falling returns on investments have forced private house builders to rethink their investments decisions. REFERENCES 1. Gibb, K 2003, 'Transferring Glasgow's council housing: financial, urban and housing policy implications', European Journal of Housing Policy, vol. 3, no. 4, pp. 89 - 114. 2. O'Connell, GE 2002, 'Problems with the US program approach to urban housing: can Europe lead America to a policy solution in 2002 and beyond', European Journal of Housing Policy, vol. 2, no. 3, pp. 293-307. 3. Salins, P 1987, Housing America's Poor (Urban and Regional Policy and Development Studies), University of North Carolina Press Enduring, USA. 4. Thomas, RG 1996, 'Indemnities for long-term price risk in the UK housing market', 5. Journal of Property Finance, vol. 7, no. 3, pp. 38 - 52Top of Form . 05. Vliet, WV 1996, Affordable Housing and Urban Redevelopment in the United States: Learning from Failure and Success (Urban Affairs Annual Reviews), Sage Publications, California. Top of Form 06. Vries, PD & Boelhouwer, P 2005, 'Local house price developments and housing supply', Property Management, vol. 23, no. 2, pp. 80 - 96. 07. Norwood, G 2009, The Housing Downturn: Picking up the Pieces: - A Guide for Estate Agents and Developers, Estates Gazette, UK. Read More