The price rising of lower-priced housing

        Shelter is one of the necessities to meet our physiological needs. This article from 'The New York Times' a newspaper's website (http://www.nytimes.com/2012/09/26/business/home-prices-climb-again.html)  is mentioning about the lower-priced housing is rising faster than the middle-priced housing and upper-priced housing. The demand for a shelter is highly but not perfectly inelastic, which mean the demand for housing will not have affect so much while the price of housing have a highly increases.    

        Lower-priced housing is relatively inelastic for the single who is lower-income classes because they only can afford the selling price and the rent of lower-priced housing. They can decide whether to purchase it or rent it. Single who is lower-income classes may prefer to rent a house rather than purchase it. They may also share a house with the other who is willing to share the rent. This can decrease their expenditure on rent expense. Furthermore, some of the single who is middle-income classes may want to purchase lower-priced housing before, yet they may purchase the middle-priced housing as a substitution for the lower-priced housing as the price of lower-priced housing is rising.  

         According to the law of demand, as the price increase, the quantity demanded will decrease. The quantity demanded is varies inversely with the price as long as other things remain the same or ceteris paribus. The quantity demanded for lower-priced housing decreases as single who is lower-income classes are sharing their house with others. From the graph A above, when the price is rising which is from P1 to P2, the quantity demanded is decreasing form Q1 to Q2, which is from point A (the black dotted line) to point B (the red dotted line). As the lower-priced housing is relatively inelastic for single who is lower-income classes, the quantity demanded will not have high percentage of decline compared with the price. In other words, the percentage of change in quantity demanded is less than the percentage of change in price.

         Besides that, the law of supply is when the price increase; the quantity supplied will increase. The quantity supplied will increase if the price raises and fall if the price falls, as long as other things do not change or ceteris paribus. As the price of lower-priced housing is rising, the suppliers of lower-priced housing are willing to supply more and more houses to gain more revenue. The quantity supplied of lower-priced housing will increase as the price increases. From the graph B above, the price increases from P1 to P2, the quantity supplied also increases from Q1 to Q2. In other words, it is from point A (the black dotted line) to point B (the red dotted line). Consequently, there will be a little surplus on lower-priced housing in the market as the quantity supplied of lower-priced housing is more than the quantity demanded of lower-priced housing.

        If the price of houses increase severely in western country, the government may put in a rent ceiling to make the rent lower, so the lower-income classes can afford the rent of housing. One of the good examples is the rent ceiling in the New York, USA. As the price of houses rises, the rent of houses will increase as well. Once the government put in the rent ceiling, the rent of houses will be more affordable for the lower-income classes and middle-income classes. Nevertheless, rent ceiling may not achieve what the government expected. The rent ceiling may not benefit directly for those who are lower-income classes and middle-income classes.

        From the graph C above, the price and the quantity demanded before the rent ceiling is putting in is marked as P1 and Q1 respectively. After the rent ceiling (P2) is putting in, the quantity demanded will increase from Q1 to Q3 as the rent is cheaper. However, the supplier may not want to supply more when the rent is lower as the revenue is lesser. The quantity supplied will decrease from Q1 to Q2. The quantity supplied will not meet the quantity demanded. In this case, when the quantity demanded is increasing and the quantity supplied is decreasing, a severely shortage will occur. This will also cause the underproduction which is a type of market failure. Hence, they will be a social loss or deadweight loss (area shaded with gray color). The consumer surplus and producer surplus will shrink. It will also have a potential loss from searching activity (area shaded with purple color) and increase in the opportunity cost. Moreover, this will only benefit the black market. The supplier who do not willing to supply at the price ceiling may want to supply to the black market as higher revenue will be gained. Some business man may acquire a big amount of lower-priced housing and sell them with higher price (P3) in the black market to gain a higher profit. Consequently, this will increase the opportunity cost of the consumers.

        In Malaysia, the housing price is increasing since 20^th century. The government in Malaysia has not put in the price ceiling. The government announced the 1Malaysia Housing Programme (PR1MA) which is a programme that constructs affordable housing for middle-income earners. This programme directly benefited to the middle-income classes. The requirement for the programme is the individual must be Malaysian. This programme is only for the individuals or the families with monthly income of between RM 2,500 to RM 7,500 which is middle-income classes. This will effectively benefit the targeted population. However, in my opinion, I think this programme will be better if the government adjust the requirement for the individual or families with monthly income of below RM 5,000. Therefore, this can benefit not only middle-income classes, but also lower-income classes. I think government should provide more welfare for lower-income classes to prevent a big gap between lower-income classes and middle-income classes.

        Above is the comparison of strategy on increasing of housing price in USA and Malaysia. Both countries’ strategies are not effectively to confront the price rising of the lower-priced housing. They are not effectively on helping the lower-income classes and middle-income classes. However, I would choose the 1Malaysia Housing Programme (PR1MA) rather than the price ceiling. It is because PR1MA have a targeted population, while rent ceiling didn’t have.