Government Intervention in the Housing Market and Is It Ethical?

Government Intervention in the Housing Market and is it Ethical? Intermediate Microeconomics Two schools of thought encompass the intervention of government into the national economy. On the one hand there are those who believe that state intervention is not only beneficial but also essential for the creation of a stable economy. However, there too are those who contend that government intervention sub-optimises the economy and the free market should be left to its own devices. The current state of the domestic housing market helps to build a foundation for those who advocate for greater government intervention in the economy.Owning your own home is for many a life-long goal; government intervention has the ability to bring this dream to fruition for those in lower socioeconomic circumstances. A combination of taxation, subsidised mortgage rates and government incentive schemes are the most commonly used tools of intervention into the housing market that are available to intervention ist national governments. Opponents of this theory believe that letting the free market regulate the housing sector is the fairest and most effective means of reducing or eliminating government intervention all together.There are, however, ethical issues intertwined with government intervention within the housing market and these issues must be weighed up against the economic and social benefits. Without regulation many would find homeownership to be unaffordable and unattainable. Microeconomic theory states that lower rates of owner-occupied homeownership would affect the supply and demand for housing within the residential market. Therefore forcing the price of rentable property well above what many lower socioeconomic families are able to afford.This subsequently has a flow-on effect, rates of home ownership tend to be in lower in areas of low socioeconomic standing, where unemployment is high, income is low and consumer confidence is down. A desire to increase the rates of homeo wnership is the catalyst for government intervention in the market. For this reason governments seek to regulate the housing market as a means of making it an attractive and ultimately more affordable investment for the average family. Homeownership is central to a state’s economic growth and overall financial stability. Residential investment constitutes a large portion of national capital formation.Poterba writes; â€Å"In the United States, real estate itself accounts for more than 1/3 of all fixed capital stock and a similar fraction of real assets in other developed countries† (Poterba, 1989). Economic policy usually provides favorable income tax incentives to homeowners; government incentives, for example first time buyers tax credits and subsidised mortgages. These policies are usually the only reason prospective homeowners are able to enter the market. Economics teaches people to respond to incentives; therefore homeowner’s entrance into the owner-occupi ed sector creates economic responsibility by means of servicing a mortgage.This action forces homeowners into stable employment, relative income and creates consumer confidence all factors of microeconomic stimulation within the economy. Government intervention within the housing market is both ethical and unethical. Some would say that government intervention within any market is unethical. Ethically is it right for a government to intervene in the economy, as what was once used as a market mechanism can in turn become a market norm. Government intervention is see by many as the government initiating force and imposing on ones right to liberty. Morally and ethically that would be an injustice upon ones self.But with that in mind governments introduce economic policy because they have a moral obligation to help those who are less able. Morally the government has the duty to ensure that those who are disadvantaged are given equal opportunities to succeed. According to social contract theory and those who would subscribe to the Hobbesian state of nature; one ethical stream of thought would say that governments should not exist in the market place at all. If and only when it is essential then they are only in place to offer retaliation of force in order to preserve individuals rights. In turn preserving free markets.It is well documented that the United States regulation within the housing market is unethical. Fannie Mae and Freddie Mac whom of which are both government backed and subsidised mortgage lenders, were seen as too big to fail. Until they did, the way government policy was constructed around these two giants of the housing market was so ethically and morally corrupt that it poisoned the entire economy. Economic policies put in place would allow almost anyone homeownership, policies that allow no deposit, no proof of employment and no proof of income are themselves morally corrupt.This type of regulation would construe to a gross ethical breach. Policy that allowed individuals to set themselves up for failure is obviously morally corrupted. The principal alternative to government intervention in the housing market is to end all government regulation and state-mandated economic policy from the market, effectively creating a truly free market. Common consensus on free markets are that inherently people will choose to better themselves without the need for government regulation and naturally people will choose to improve their situation.In an article published by the Brookings Institute, former chairman of the United States Federal Reserve, Alan Greenspan, hypothesized that this alternative to government intervention would result in â€Å"interest rates and mortgage rates would clearly be higher and the size housing market would be significantly smaller† (Greenspan, 2011). This limits the access to affordable housing, a lack of government intervention would essentially eradicate achievable ownership; house prices would soar ne gatively affecting demand while the size of the market would shrink simultaneously, severely limiting a markets housing supply for both purchase and rent.Hennessy explains under these economic conditions, â€Å"High mortgage interest rates and high down payment requirements might prove that the opportunity cost of owning is too high† (Hennessey, 2001). Therefore as previously mentioned unattainable homeowner ship would lead to a downturn in the economy, raising unemployment, decreasing the supply of rental property, decreasing the demand for property both for home owners and investors as well as leading to a downturn in consumer confidence all of which create a large negative effect on the economy and decrease economic growth.In conclusion the economic case for government intervention is strong. Governments are in place to help those less fortunate, this type of economic policy not only helps stimulate the economy in a multitude of ways but it also enables homeowners to enter the market, creating economic growth and long term financial stability. The argument, government intervention in the housing market is systemically flawed, due to sub-optimisation of the economy and erosion of free markets is incorrect.There is however a lesson to be learnt from what has happened with government intervention within the housing market, namely the global economic crisis. This was not entirely due to government regulation but in some ways the opposite, not enough regulation. Ethically there are strong views around government intervention and some do have merits. Namely market mechanisms used to guide economic policy, they can then become seen as market norms.When this happens you erode the moral value of what you are trying to accomplish in the first place. References Greenspan, A. (2011). Imagining a Housing Market Without Government Intervention. Retrieved 25-09-2012, 2012 Poterba, J. M. (1989). Residential Real Estate and Capital Formations. Regional Science and Ec onomics. Hennessey, S. M. (2001). The Impact of the Tenure Choice Decision on Future Household Wealth.