Housing Economics: Impact of Subsidies on Supply and Demand

HOUSING ECONOMICS

Due to rising demand and elastic supply, there is a vast possibility that prices will fall in
upcoming period that is a key concern for the economic strength. Despite looming cost of
borrowing, deposit collection is still a biggest barrier or challenge for the buyers to have their
own houses. As per the survey of 2000 Britishers, 2/3 consider it as a main barrier, however,
15% are worrying about mortgage availability and higher rate of interest. Out of 535 mortgage
holders, only 1/3rd people showed their concern about increasing cost of borrowing which may
affect their ability of loan repayment. Thus, the results found that personal financing is a major
difficulty encountered, however, majority of people who wish to buy their own home are worry
about their job security. Currently, in August 2017, average housing prices in the UK stood at
£222,293 (Partington. 2017). Despite such concerns, the demand for housing market is
continuously increasing.
Figure 1 Total number of households in UK
(Source: UK Housing Market. 2017)

Figure 2 Households by type
(Source: UK Housing Market. 2017)
The housing market includes privately owned houses, mortgages and rental property also.
In earlier time of 20th Century, only 10% of the total homes were owner occupied which rose up
to 70% beyond the average shows that people wish to have their own houses. Currently, in UK,
there are over 27 million households by 2016. The housing market gains significant importance
for the nation due to two reasons: one is housing is a biggest item of consumer wealth and
another is fluctuating housing prices considerably effects the other economies.

(Source: Subsidies, 2016)
Above graph depicts inverse relationship between demand and prices charged. Income
and substitute effect explain the relationship very well by stating that higher the prices, tends to
decline real income, as a result, people prefer less demanding. In such circumstance, people
demand other alternatives such as rental property. Conversely, falling price encourage them to
buy more due to increasing real income, at the time, renting is found less attractive. There are
some other effects also, because speculators try to gain speculative benefits through higher
demand of houses, when prices are high (Tsai, 2014). In housing market, price is not a single
factor that affects demand and there are number of other factors which affect demand like aging
population, income, social trends, lifestyle, interest rate, legislation, technology, credit
availability, loans availability, substitute product prices.
Subsidy is one of the important factors of demand determinants. It simply can be defined
as a monetary assistance given by the government in order to encourage production as well as
consumption level. Unit subsidy is subsidy received by producers on one unit of an item. Thus,
by this way, it works as a reward for the consumers and producers which induce or motivate
them to produce or consumer high quantity. It may be of two types, one is demand-side subsidy
and another is supply-side subsidy. As name implies, when government want to promote the
production of certain specific item or service, then supply subsidy is offered to the manufacturers
resultant higher output, unlike it, when buyer receive subsidy or a refund on their total purchase