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Market Failure

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Market Failure

The housing market may experience failures due to a number of reasons, such as

imperfect information, externalities, and public goods. Imperfect information may lead to buyers

and sellers not being able to accurately assess the value of a particular home, while externalities

may arise when one party's behavior (e.g., noise) affects the value of another party's property.

Finally, public goods can be a problem when an individual has the incentive to avoid using them,

as is the case with public parks. Despite the various reasons for market failures, the main source

of the housing market failure is overbuilding which can have negative consequences for

consumers and society as a whole.

Overbuilding or creating too many homes when demand is inconsistent with the available

supply is the primary source of housing market failure. It can happen for various reasons,

including government incentives (low-interest rates) and incorrect assumptions about future

demand. Overbuilding increases the number of homes available for purchase and decreases the

price of those homes. This has a negative impact on people who can no longer afford to buy

homes, and it also has a negative effect on the economy as a whole.

The impact of the housing market failure on productive efficiency is that it leads to an

oversupply of homes. This oversupply decreases the value of homes, making it more difficult for

people to purchase homes and increasing the demand for housing. This harms the economy as a

whole because it decreases the amount of money available to be used in other productive

activities. Subsequently, the economy may experience slower growth and increased

unemployment because people cannot find jobs that match their skills and preferences.

Additionally, the oversupply of homes can lead to an increase in housing prices not warranted by

market demand (Gray, 2022). This negatively impacts people who cannot afford homes and also
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negatively impacts the economy as a whole because it decreases the amount of money that is

available to be used in other productive activities. Overall, housing market failure has a

significant negative impact on both the economy and individuals because it reduces the

availability of affordable housing, drives up the cost of homes, and decreases the number of

available jobs.

When the housing market fails, both consumers and producers suffer because homes

cannot be produced at prices that people can afford. Because housing is too expensive, specific

sectors are harmed by market failure because they cannot turn a profit from it. The breakdown of

the housing market also hurts those in particular situations because they cannot find housing

(Gurran, 2022). An overpriced housing market generally breaks a wide range of people and

businesses. People who are in specific conditions suffer from market failure because they cannot

find a place to reside or because they cannot afford the available housing.

There are several ways to tackle the issue of affordable housing, and it is essential to

choose the solution that best fits the needs of the local community. Each solution has its benefits

and drawbacks, and weighing these before making any decisions is essential. Some solutions,

such as building new housing, may significantly impact the overall situation more than others

(Kim & Hammitt, 2022). It is necessary to try different solutions to find the best one for the local

community because affordable housing will continue to be an issue without a concerted effort

from all involved.

Increasing the availability of affordable housing could be done by increasing investment

in social housing or introducing policies that make it easier for people to buy their own homes.

Making it easier for people to get mortgages could be done by increasing credit availability or

introducing policies that make it easier for people to pay back their loans (Zhao, 2021).
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Therefore, housing market failure can be solved by increasing the availability of affordable

housing, increasing the availability of credit, and introducing policies that make it easier for

people to repay their loans.

Creating a market for secondhand housing could be done by creating zoning regulations

that make it easier for people to build new housing or by introducing policies that make it easier

for people to sell their homes. Raising taxes on property or incomes could help pay for

affordable housing or create incentives for people to buy or rent houses. However, it is also

essential to be aware of the potential unintended consequences of any changes made to the

housing market (Braun, 2022). For example, if increasing investment in social housing leads to a

shortage of available homes, people may be forced to live in less favorable conditions than they

would otherwise. Care should be taken when making any changes to the housing market to

ensure that all of the consequences of those changes are considered.

There are two potential solutions for increasing the availability of affordable housing, for

example, implementing a market-based solution in which the government sets a price for housing

units and allows the market to determine the number of units produced. Alternatively,

implementing a subsidy-based solution in which the government provides financial assistance

directly to individuals or organizations that produce housing units (Gurran, 2021). The market-

based solution is more efficient because it allows the market to determine the number of units

produced. In contrast, the subsidy-based solution would be more beneficial because it would

provide affordable housing to more people. The market-based solution is worth the cost of

implementing it, as it leads to more efficient market outcomes and increased access to affordable

housing for those in need.

The cost of implementing this solution would be the price of the materials needed to

build the housing units and the labor required to construct them. The benefits would be that more

people would have access to affordable housing, and the overall market would be more efficient

because there would be more available units (Gregory, 2022). The benefits achieved from market

intervention are worth the cost of the intervention. Therefore, the market should be implemented

to increase the availability of affordable housing.

In summary, housing market failure refers to a situation where the availability of

affordable and available housing is not adequate for all people, which causes problems such as

overcrowding and homelessness. This problem can be exacerbated by zoning laws and restrictive

lending practices, which keep prices high and make it difficult for lower-income people to afford

a home. To address this issue, policymakers may need to take various measures, such as

increasing the supply of affordable housing or relaxing zoning laws. Overall, the housing market

failure is a significant issue that requires a concerted effort from government and private sector

actors to resolve.
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References

Gray, N. (2022). Correcting market failure? Stalled regeneration and the state subsidy

gap. City, 26(1), 74-95.

Gurran, N., Pill, M., & Maalsen, S. (2021). Hidden homes? Uncovering Sydney’s informal

housing market. Urban Studies, 58(8), 1712-1731.

Kim, S. K., & Hammitt, J. K. (2022). Hurricane risk perceptions and housing market responses:

the pricing effects of risk-perception factors and hurricane characteristics. Natural

Hazards, 1-19.

Zhao, H. (2021). Essays on Economic Uncertainty and Housing Market in China (Doctoral dissertation,

City University of New York).

Braun, J., Burghof, H. P., Langer, J., & Einar Sommervoll, D. (2022). The Volatility of Housing Prices: Do

Different Types of Financial Intermediaries Affect Housing Market Cycles Differently? The Journal

of Real Estate Finance and Economics, 1-32.

Gregory, J. (2022). Social housing and welfare spheres. In Social Housing, Wellbeing and Welfare (pp.

141-159). Policy Press.