Positive planning

Latest government proposals on housing-building were revealed today and whilst, Labour have criticized the plans for not being “up to the scale of the challenge”, I myself believe that they may provide the spark required to ignite the stagnating housing market. Here are 3 reasons why...

1)      More work for builders

By allowing for extensions of up to 6m long to be built without planning permission (double the previous distance) more homeowners should be convinced that building an extension will actually add significant value to their home. This in theory would provide more business to builders, plumbers, carpenters and the like where as a result they would be able to offer more jobs and apprenterships to people as demand would require it. A reduction in unemployment would then increase consumer confidence and help to lift the UK out of the double dip recession.

2)      Reduced requirement for ‘affordable housing’

Is this the last we will see of this?

By iniating this the government is effectively giving building contractors the green light to go ahead with projects that previously they would not have attempted due to the margins not existing. This means that more projects will be started providing both more employment and the infrastructure that the UK is desperately crying out for. It will also mean that fewer housing estates will be left as uncompleted ghost towns due to over inflated prices as houses will be built to suit demand rather than out of necessity. The new regulations will therefore, help prevent the building of ‘ghost areas’ whilst encouraging development.

3)      New Firstbuy scheme to help first time buyers

The Firstbuy scheme will allow 16,500 would be home-owners to receive an equity loan of up to 20% of the purchase price. The aim of this would be to stimulate the housing market where due to the current dire state of the economy people are unable to afford a house. This means that at the current time homes are either being rented by demanding landlords or left empty. Therefore, by allowing more people to enter the market there will be more competition for housing which David Cameron hopes will, “Kick start the economy”.

I personally feel that these schemes, whilst only a step are a step in the right direction. By reducing enforcements on planning regulations and affordable housing, more construction will be encouraged and as a result additional jobs will be created. This can only be a positive and the Conservatives should be applauded because of this.

The Monopoly Supremacy

We are told that monopolies are rapidly dominating individual markets and the latest news today seems to confirm this, but what actually are they? A monopoly is characterized by an absence of competition, which often results in higher prices and inferior products and whilst companies such as Dutch Shell and Tesco don’t enjoy a full market share they have enough to have a strong enough influence so that a rise in variable forces will lead to an upwards shift in short run average cost and marginal cost (as shown below in the diagram).

Example 1

Tesco much criticized by economists (Andrew Simms is particularly scathing in ‘Tescopoly’) and consumers alike for their 30.7% share in the grocery market is once again in the news for its latest venture. Since Monday the supermarket has been selling home loans that aren’t exactly good value. At 3.89% Tesco’s five year fix at 3.89% is 0.5% worse than the market leader, a considerable difference. However, despite this the loans are expected to be a hit as club card users will see a private benefit. That benefit equates to one point for every £4 on their monthly mortgage repayments, which can be spent in store. Thus meaning any ‘saving’ goes straight back into Tesco’s pockets. Market dominance at its most evident.

Example 2

The office of fair trade today launched an enquiry into rising fuel prices. With many people unable to afford to drive the main focus of the enquiry will be on the market dominance of the six main fuel suppliers. A call could therefore, be made for more transparency in fuel prices and with the average price of diesel and petrol being 143.52p and 138.99p a litre respectively there is certainly reason for concern there. Whilst, fuel prices were expected to rise due to ‘peak oil’ being reached by 2020, many believe the rise is excessive and as such is a perfect example of a monopolistic market.

Market monopolies are growing all too frequent and are one of the reasons for the death of the high street. Something must be done and soon before we are buying everything from Tesco.

Economic conundrums!

How good is your economic knowledge? Put it to the test in this fun but testing quiz...

1) Which investment bank collapsed on the 15th of September 2008 leading to a rise in the cost of credit and plunging stock markets?

a) Lehman Brothers                    b) Merill Lynch                     c) JP Morgan

2) Who was the chancellor of the exchequer between the 28th June 2007 and the 11th May 2010?

a) George Osbourne                   b) Alistair Darling                  c) Gordon Brown

3) "The study of strategic decision making" is the definition for what?

a) Game theory                           b) Competitive thinking         c) Inflation

4) Where did the disease that sees an increase in the exploitation of natural resources lead to a decline in the manufacturing sector herald from?

a) Britain                                     b) Holland                            c) Kenya

5) Which company announced recently that it will 'shed' 900 jobs in an effort to save costs?

a) Apple                                      b) Holland and Barrett          c) Direct Line

Answers to the quiz can be found at the bottom of the previous post.

Is price stability all what it cracked up to be?

After the 1970’s and 1980’s where inflation was allowed to spiral out of control in nations such as the UK and in particular the USA (where inflation levels were often in double digits) a controlled low inflation rate has often been seen as crucial to economic stability. Due to this, everyone appears keen to take credit for it, with policymakers and bankers being common claimants. However, is price stability really that important?

Stephen D. King, chief economist of HSBC believes this not to be the case claiming that;

“The blinkered pursuit of low inflation in the west has been a mistake, leading to asset price bubbles, economic booms and busts and excessive accumulation of debt”

This is an intriguing argument and one that needs to be looked at. Whilst controlling inflation helps to enable stable employment with price volatility not effecting prices and wages, its actual relationship with the economy isn’t as stable as one would imagine. With central bankers being perhaps the keenest advocates of controlled inflation they often control short term interest rates in order to meet broader economic aims. This however, isn’t wholly healthy for the economy as it plays upon people’s fears.

For example were interest rates to increase people may fear that more austere times are upcoming and as such be less willing to spend and will have an increased penchant to save. A fall in interest rates meanwhile may lead to a rise in demand for housing due to lower mortgage rates. Whilst both a fall or rise in interest rates will effect the attractiveness of a nation for foreign investment with the latter making it more attractive and as a result leading to a rise in inward investment.

The deutschmark was rendered useless due to inflation

Controlling inflation rates therefore may well appear to help economic stability, and in some sense it does as the value of money is sustained without there being any volatile changes. However, the opportunity cost means that the control of interest rates to help insure the low inflation rates can often lead to negative repercussions such as reduced consumer spending and a decline in the competitiveness of a countries exports. Thus showing that price stability won’t always ensure economic stability.

Answers to quiz: 1-A, 2-B, 3-A, 4-B, 5-C