Question

Evaluate the extent to which a maximum price on rented housing is an effective method of reducing the externalities associated with poor quality housing in the

UK.
For many households in the UK, their house/property is their primary asset and source of wealth. In the 12 months to August 2022, average house prices in the UK rose to £294,260 - an increase of 11.5% from August 2021 according to the Halifax House price Index. This increase has been much faster than average wage rises and, economists argue, has helped to widen inequality in the UK.
There have been a variety of factors that have helped to keep house prices high and rising, not just in the last year, but over the last 10 years. On the demand side, persistently low interest rates have improved mortgage affordability, and on the supply side planning restrictions, limited availability of new building sites and difficulties sourcing raw materials to build new houses have all contributed to higher prices, which have now become unaffordable for many.
The alternative to buying a house is rented accommodation, and because of rising house prices the UK rented housing market has also seen significant changes. According to homelet.co.uk, the average monthly rent in the UK in September 2022 is £1,159 per month, an increase of 9.2% since 2021. Although there is regional variability, for some households, housing costs may form as much as 75% of their monthly income according to propertyinvestortoday.co.uk.
Many economists believe that good quality housing is a form of merit good, whilst poor quality housing is considered by others as a demerit good which can have lasting impacts on a person's quality of life. As such, many agree that a shortage of good quality affordable housing may require government intervention to improve resource allocation in the housing market.

Answer 1

While the maximum price on rented housing can make it more affordable, it often leads to landlords reducing maintenance and essential services, worsening housing quality. Policymakers must consider these trade-offs when implementing rent control policies.

Step-by-step explanation:

To assess the effectiveness of a maximum price on rented housing as a method of reducing the externalities of poor quality housing in the UK, we must consider the implications of such a policy. A maximum price, often referred to as rent control, aims to make housing more affordable for tenants. However, rent control can lead to unintended consequences. For example, some landlords may choose to convert rental properties to co-ops or condos to escape rent control regulations, reducing the available rental stock.Further, landlords subjected to rent control are often incentivized to reduce their spending on maintenance and essential services, such as heating and cooling, to mitigate the losses incurred from lower rents. This can deteriorate the quality of housing, thus creating an opportunity cost, where renters may pay less in rent but suffer from poorer living conditions. The first rule of economics, pertaining to opportunity costs, suggests that there is no benefit without a corresponding trade-off.Rent control may appear to be an attractive solution for improving housing affordability, but its effectiveness is curtailed by its impact on housing quality. It is not a clear-cut solution, and policymakers must weigh the potential benefits against the inevitable opportunity costs.