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Affordable housing remains as one of the key issues in the UK; average house prices are 7.6 times the average annual salary (ONS, 2016). In this essay, affordable housing will be taken to mean housing that is affordable in the market, in respect of the national average salary, not relating to government's provision of affordable housing. This divergence is particularly predominant between the North and South, where disparity in economic growth and affordability prevail. The North is characterised by lower growth and lower house prices, while the South has an overheated housing market and high growth. This contributes to the North-South divide in the UK. Policies subsidising jobs creation in the North have been suggested to indirectly foster affordable housing and ensure strong and inclusive economic growth across the UK, through shifting the demand of housing from the South to the North. Throughout this essay I will examine the economic theories, practical implications and limitations behind this policy. Ultimately I will argue that the policy is not the best way to tackle the housing affordability problem and promote sustainable growth.
In January 2017, the average house price in the North was £140,666 (ONS, 2017), which was about 5.3 times the national average income (ibid). The average house price in the South was £333,000, which was about 12.6 times the national average income (ibid). Furthermore, the average age of first-time buyers in the North was 30, whereas it's 32 in the South (Halifax, 2017). Clearly, there is an affordability gap; housing prices are more affordable in the North than the South. A cause behind the affordability gap is the overheated market in the South, causing an excess demand in the market and driving up housing prices in the South. "Housing costs should be at such a level that the attainment and satisfaction of other basic needs are not threatened or compromised." (NERSI) Affordability is one of the seven principles to be satisfied in human rights to housing (NERSI). There are also great economic disparities in the country, with economic growth in London forecasted to grow 27% by 2025, almost twice the combined rate of growth in Northern cities (CEBR, 2015). The government must take action to ensure that everyone has access to affordable housing and there is a strong and inclusive economy across the UK.
A subsidy is an amount of money paid by a government to the firm to lower cost of production (CGP). To possibly increase the quantity of jobs in the jobs market, the government could intervene by subsidising job creations. In this particular context one could say, there would be a positive externality created by this policy, which creates a benefit to third parties - more jobs for workers. In theory, due to lowered costs of production, the producers that are given subsidies have the incentive to employ more people, shifting the supply curve in the job market in the North outwards, which increases the quantity of jobs available in the market. Because of the abundance of jobs available, unemployed persons in the South may be attracted to work in the North, thus, they would move to the North, which increases the demand for housing in the North, whilst the demand for housing in the South decreases. Theoretically, it could cool down the overheated housing market in the South. A decrease in demand for housing in the South, ceteris paribus, could shift the demand curve inwards, causing the price to drop and the houses in the South to be more affordable, in respect to the average salary.
Fostering an inclusive economic growth across the UK could be another objective achieved through subsidizing job creation. There are serious economic imbalances in the country. As previously warned by Nick Clegg, "Emasculating the north and overburdening the south. Trying to prop up a nation of 100,000 square miles on the profits of just a single Square Mile." The UK economy is too dependent on London's financial services and idling the economic plans in the North, whilst relying on the South's tax revenues to pay for the 'low wage, high welfare' cities in the North. With the fear of the unfortunate impact of Brexit, if the economy in London cripples, the whole UK economy would suffer severely, without other parts of the country to support the economy. On the contrary, the most successful economies in the world are decentralized-planned economies, which does not mainly rely on a single city, but a multiple of affluent cities, for example, Germany is driven by Berlin, Frankfurt, Munich and the Ruhr. When each city has its own economic strength, this would allow the demand for housing to spread more evenly across the country's several cities, to ensure more affordable housing prices across the country. Hence, regional inequality would be less prevalent. The UK economy is currently neither sustainable nor inclusive, which may deter itself from being a strong economy in the long run, as a strong economy should be inclusive to be sustainable. The policy could possibly address the situation. Other than ensuring a higher affordability of housing in the South, there would be a further benefit of promoting growth in the North. In theory, the increase in demand for housing could drive the aggregate demand in the North in the long run, as when more and more people inhabit in the North, an increase in consumption of goods and services in the North would follow. The increased number of workers in the North could also create more output of goods and services. This could possibly narrow down the North-South divide and encourage a stronger, more sustainable and inclusive economy across the UK, not only in the South. Hence, this policy could contribute to the economic development of the North.
A number of theoretical limitations and practical implications could limit the effectiveness of the policy. Firstly, deciding on an appropriate rate of subsidies on job creations to correct the market failure requires extensive research and planning. However, due to asymmetric information, it often leads to information failure, as it is challenging to measure the extent of a market failure, which often leads to misallocation of scarce resources, not achieving Pareto efficiency. Instead, by the Laissez Faire approach, the market should fix the problem itself anyway, to allocate resources efficiently, e.g. if setting up offices or factories in the North is indeed cheaper than the South, along with the benefits of agglomeration economies, firms would rather choose the North, to reduce their costs of operation and benefit from the established area, whilst creating more jobs in the North.
Geographical mobility of labour measures the ability of workers to move in order to find new or better jobs. Economic theory of this policy assumes that labour is perfectly geographically mobile. However, if the geographical mobility of labour is low, workers may be reluctant to move to the North to work. There could also be immeasurable opportunity costs for workers to move to the North, e.g. a young family with children has to relocate all of their children's schools, extra-curricular activities, etc. Along with the upcoming construction of High Speed 2, workers in the South could travel to and work in the North swiftly without moving over, this would not increase the demand for housing in the North, nor decrease the demand for housing in the South.
In 2015, for every 12 jobs created in the South, one is lost in the North (Centre for Cities report). A report also suggests that there is a weakening population growth, and more importantly, a declining working population in the North (ONS, 2016). These could imply a declining job market in the North and workers are more inclined to work in the South. Even if there are subsidies on job creations, it may not have much of an effect, as the demand for workers is genuinely weak. Particularly, if job creations are in the manufacturing industry, which the North's economy relies more on than the rest of the England, as it accounts for 9.5% of the jobs in the North, compared to the national average of 7.6% (ONS JOBS05, 2017), the economy in the North may not grow as much, since manufacturing is seen as a declining industry, with its overall contribution to the UK economy constantly diminishing. The subsidization may then lead to a government failure of unintended consequence. Hence, it would lead to an inefficient allocation of resources.
Subsidising job creation involves largely expensive administrative costs, e.g. to measure the appropriate rate of subsidies, pick the industries with the highest growth potential to subsidise in and ensure that the costs are used efficiently by the firms to fund the creation of jobs. Those costs often turn out to be sunk costs. It may be more efficient and cost-saving to use the funds to focus on more direct methods to provide more affordable housing in the South.
Inevitably, there will be time lags to create more affordable housing affected by the subsidization of job creation, as it would take time for workers to plan and move from the South to the North, to lower the demand for housing in the South.
In light of Brexit, there are vast uncertainties and low consumer confidence surrounding the UK. Remarkably, a recent study also shows that the London housing market is in deepest slump since 2009 (RICS, March 2017). Indeed, until now, it is still hugely unpredictable what Brexit could mean to the UK. It is greatly dependent on whether the UK could bargain for a decent trade deal with the EU after leaving the 'single market' and maintain its attractiveness for inward investment. Brexit would also suggest that the North would be losing its Northern Powerhouse funding from the EU Structural Funds, which means the government might have fewer funds to spend on subsidising job creations in the North.
One may argue that subsidizing job creation is not sufficient to be the most direct, efficient and cost-saving solution by itself, and it is successful if and only if an appropriate rate of subsidies is set. It also has to factor in geographical mobility of labour, situation of current job market, consumer confidence, etc. Unless it is used in conjunction with policies, such as providing rent subsidies for low-income groups, more funds for the Help to Buy schemes or one-off cash grants for first time buyers, the best alternative that could feasibly work better on its own is providing more public housing in the South. An existing policy, section 106, has been previously successful in providing more affordable housing by requiring new housing developments to provide a pre-determined proportion of affordable housing. In theory, by providing more public housing in the South, the supply curve of housing shifts outwards, increasing the equilibrium quantity of housing and decreasing the equilibrium price of housing, making housing more affordable in the South. As a result, whilst the price gap between the North and the South narrows, at the same time, the government has already been making policies to develop the economy in the North in recent years, such as building Kingsway and Crown business parks in Rochdale and devolving more power to the North. Consequently, this could stimulate the overall economic growth in the North through moving the general demand away from the South and make housing more affordable in the South, in achieving the ultimate aim of narrowing down the North-South divide.
It is favorable to develop the economy in parts other than the South of England, to stimulate the housing demand and overall economy in the North by subsidising job creations. Nevertheless, subsidising job creation is not the best way to ensure affordable housing and a strong economy across the UK, given that empirical data and compelling theories do not support the policy well enough. Perhaps the government should consider alternatives that could work better, narrow down the North-South divide, ensure affordable housing, as well as a strong and inclusive economy across the UK.
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