Should the government build houses or leave it to the free-market?

Readers Question: should the government build houses itself, encourage the private sector to build more houses, or play no part in the housing market at all? (justify your answer)

Arguments for Government Building Houses


  • House prices are currently too high due to a shortage of supply. If the government increase the supply it will help overcome the shortage and keep houses affordable for first-time buyers. If the government don’t build houses there will be a continual shortage and the market will be subject to fluctuations.
  • Shortage acute in certain areas. The government need to target house building in certain areas, such as London and the south-east.
  • Inequality. The high price of UK houses means that it is increasing inequality. People leaving university have to either pay high rent or pay a lot for a mortgage. This means that many young workers have low discretionary income. There is an increasing wealth gap between people in their 20s and people in their 50s. Government supply of houses could help low income earners.
  • Market failure. An issue with the housing market is that there is a considerable degree of market failure. usually when demand rises, firms are able to increase supply. But, with housing shortage of land, difficulty in getting planning permission and opposition to homebuilding have left a shortage – meaning that the market responds by house prices rising faster than inflation. Government intervention can overcome this shortage.
  • Housing as a merit good. Housing has attributes of a merit good. Good quality housing has positive externalities to the economy and local environment. A shortage of housing can lead to homelessness and social issues, such as crime and disillusionment.

  • Improve flexibility of labour market. The shortage of housing in certain areas is leading to a shortage of critical public sector workers. For example, nurses and teachers are discouraged to live in London because of high house prices. A greater supply of housing would make it easier for people to move around the country.


Arguments against government building houses.

  • Government failure. The government may have poor information about where to build houses.
  • Expensive and requires higher taxes.
  • Opportunity cost. If the government invests in building houses, it may lead to a shortage of funds for other investment that would not be provided by the free market.
  • Rather than build houses, the government could focus on reducing planning restrictions

Benefits of encouraging private sector building

  • The Government would like to encourage the private sector to build more to help overcome shortages and high prices.
    • However, building new houses could cause environmental problems such as the loss of green belt land and increased congestion.
  • To overcome this the government could encourage house building on brownfield sites and increase housing density.

Shortage of Housing in the UK

Despite strong growth in demand. It is estimated the UK needs to build 250,00 houses a year to keep pace with the growth in the number of households, the UK invariably fails to keep pace. This is because of strict planning legislation and a shortage of places to build.



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