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Quantitative Easing's Effect On House Prices

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Quantitative Easing (QE)

The government injecting billions of newly created pounds directly into banks and building societies and legally binding them to lending more money in mortgages. Is this going to increase the value of house prices?

Is QE going to devalue the pound by dilution so that in real term house prices do not increase?

Is QE going to go too far so that foreign investors will be unwilling to invest in the UK, buy bonds etc.? The Chinese have already said they are very unhappy about QE and may become unwilling to invest money in the UK.

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QE has slowed (stopped?) house price falls, without it you would have had the 50%+ fall some here were predicting.

The question is what happens when this stops?

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The theory that house prices are a simple product of money supply is incorrect. House prices rise because the ownership of the house allows you to capture others people's production. If there is reduced production than more or less that inflationary dynamic stops.

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Nett consumer borrowing has fallen from approx £9billion pcm in the boom to £0.6 billion in May.

QE has gone to foreign sellers of UK bonds and into the bottomless pit that is the banks ruined balance sheets.

Inflation is a product both of money supply and the velocity of circulation. This tranche of QE has not caused money to circulate.

House prices will continue to fall because they are too high relative to incomes and the QE we have seen so far will not stop this.

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I think its given banks the capital to mean they dont have to reposess, or at least auction in a scramble for cash. It still hasnt changed the underlying problem of wages that cant support this level of house prices though.

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I think its given banks the capital to mean they dont have to reposess, or at least auction in a scramble for cash. It still hasnt changed the underlying problem of wages that cant support this level of house prices though.

Looking at the number of repos in the auction sales I am guessing the banks are taking them into posession as fast as the market will bear.

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'Capture production'? How does that work exactly?

Actually, as we all know, house prices have an awful lot to do with the amount of credit available, and the willingness of people to take on that credit. The hope with quantitative easing was that the banks would use the extra money available in the system by lending it. To all intents and purposes, they haven't done that; they've used it to boost their reserves.

A pound coin is not worth a pound. Bear with me. It's worth a pound every time it's used. Thus if it is used 500 times in a year, it's been 'worth' £500 that year. If it does not circulate, then it's 'worth' a lot less. The money that's been pumped into the system is not circulating because the banks are effectively 'freezing' it.

Put simply, you can pump all the money you want into the system, but if no one uses it, it will have no effect. At the end of the day, it's bank lending (and the willingness and ability of people to borrow) that matters. The lending, the willingness and the ability all point to further falls in house prices.

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As usual Cynicus has some ideas. He doesn't specifically mention house prices, but you can see where this might end up.

Edited by TW11

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'Capture production'? How does that work exactly?

Actually, as we all know, house prices have an awful lot to do with the amount of credit available, and the willingness of people to take on that credit. The hope with quantitative easing was that the banks would use the extra money available in the system by lending it. To all intents and purposes, they haven't done that; they've used it to boost their reserves.

A pound coin is not worth a pound. Bear with me. It's worth a pound every time it's used. Thus if it is used 500 times in a year, it's been 'worth' £500 that year. If it does not circulate, then it's 'worth' a lot less. The money that's been pumped into the system is not circulating because the banks are effectively 'freezing' it.

Put simply, you can pump all the money you want into the system, but if no one uses it, it will have no effect. At the end of the day, it's bank lending (and the willingness and ability of people to borrow) that matters. The lending, the willingness and the ability all point to further falls in house prices.

Very well put.

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Guest happy?
quantitative easing.....sounds almost pornographic :P

Aperient.

Croton-oil economics.

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quantitative easing.....sounds almost pornographic :P

It's a word that means nothing like what it actually is, printing money. I think it is specifically chosen for this reason.

Other similarly chosen words are:

Extraordinary Rendition - Flying someone to a foreign country and torturing them.

Collateral Damage - Killing innocent people by mistake.

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QE has enabled the BoE to keep the base rate at such an insanely low level but I don't think the QE money has found its way to Joe Public via mortgages.

Low interest rates and low volumes of property for sale is the reason for the current dead cat bounce in the property market.

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'Capture production'? How does that work exactly?

The amounts paid for housing are a reflection of the amounts paid for land (locations) and land is in fixed supply.

I call it 'capture', because producers have no choice but to pay the owners of land any rising price to continue producing; it being not possible for them to create more locations to provide real supply competition for the cartel of owners. So, as production rises, the owners of sites are paid more and more from production without themselves either directly or indirectly being responsible for any increase in efficiency (they merely own sites). As a result, the benefit of increasing productive efficiency passes in a one way trade from the producers (who create it) to the owners of the sites on which they must work.

Real estate speculation is an attempt to stand downstream of this flow and simply 'capture' an increasing price producers are forced to pay in order to remain productive..the attempt also exacerbates the problem

Edited by Stars

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Quantitative Easing (QE)

The government injecting billions of newly created pounds directly into banks and building societies and legally binding them to lending more money in mortgages. Is this going to increase the value of house prices?

Is QE going to devalue the pound by dilution so that in real term house prices do not increase?

Is QE going to go too far so that foreign investors will be unwilling to invest in the UK, buy bonds etc.? The Chinese have already said they are very unhappy about QE and may become unwilling to invest money in the UK.

So come on HPC experts what is going to happen?

Last week on HPC we were told No more QE for Now

There had been articles leading up to the BOE's decision saying:

Lenders expect to make credit more easily available to households and businesses over the coming quarter but are not expecting much of a pick-up in demand, a survey by the Bank of England showed on Thursday.

The quarterly credit conditions survey showed government initiatives to boost lending had enjoyed some success -- secured credit to households increased in the second quarter for the first time since the third quarter of 2007.

But lenders expected spreads on new mortgage lending to remain wide, meaning borrowers would not see the full benefit of record low interest rates. And spreads on corporate lending were expected to widen further.

"While there are some encouraging signs in the credit conditions survey, the UK is certainly not out of the woods yet," said Colin Ellis, an economist at Daiwa.

"As long as credit scores continue to tighten, that will make it harder for households to get funding, which is likely to restrict activity, particularly in the housing market, for some time."

.........Economists are split on whether the central bank will extend its QE programme but all agree that credit conditions will be key to that decision.

Although mortgage approvals have picked up from record lows hit last year, hard indicators of lending remain weak. .......However, while lenders expected demand for loans from small businesses to pick up, they did not expect any increase in demand for mortgages.

There was also an expectation that default rates would continue to rise and little appetite to cut spreads -- the margin over the Bank rate that lenders charge for credit.

"The survey was not overly encouraging about the outlook for bank lending and therefore the prospects for overall economic growth," said Vicky Redwood at Capital Economics.

"The improvement in the balances may just have reflected the lending commitments made by lenders participating in the Asset Protection Scheme, rather than a fundamental shift in lenders' risk appetite."

Last weekend the IMF said The UK Cannot Afford Another Fiscal Rescue

And yesterday we heard Mortgages Will Get More Expensive

Lenders have quashed expectations of a return to the days of high loan to value (LTV) mortgages by warning that funding restraints are ongoing and unlikely to ease in the near future.

Dispelling any hopes that there is a glut of cheap credit set to come on stream which could boost the housing market, the Council of Mortgage Lenders (CML) said its members' ability to extend more credit was 'constrained for the foreseeable future.'

A spokesman for the CML - whose members cover 98% of all residential mortgage lending in the UK - said: 'The underlying problem is that we don't have access to the range and type of funding we used to have.

'Government intervention (namely through lending agreements with semi-nationalised banks) has improved the situation but the constraints on lenders are real.'

The CML said there was 'no realistic prospect in the foreseeable future' of the situation changing rapidly, although they said lenders were trying to make up for the loss of capacity......

However, last week in the Home Co. UK HPI 14th July 2009 it said:

......in an unprecedented campaign the Bank of England deputy governor Charlie Bean will commence a tour of the UK to explain why quantitative

easing (creating money to buy government debt) is a good idea to ‘get the UK spending’. The tour follows the BoE’s publication of a pamphlet explaining

quantitative easing – why it is needed, how it is expected to work and how the MPC are monitoring its effectiveness on the UK economy.

So what is it to be ? Can the UK really afford to print any more money ? Or will the Treasury or indeed the BOE finally listen to the BOE official who warned Darling in March 2009 Don't Try to Stop the Housing Crash

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QE has slowed (stopped?) house price falls, without it you would have had the 50%+ fall some here were predicting.

The question is what happens when this stops?

i think the qe has allowed near zirp, so i think it has had an effect, the motivation being to boost Lab popularty pre-election, but Tories have big lead (40 points i think) again now.

'Capture production'? How does that work exactly?

Actually, as we all know, house prices have an awful lot to do with the amount of credit available, and the willingness of people to take on that credit. The hope with quantitative easing was that the banks would use the extra money available in the system by lending it. To all intents and purposes, they haven't done that; they've used it to boost their reserves.

.....

Put simply, you can pump all the money you want into the system, but if no one uses it, it will have no effect. At the end of the day, it's bank lending (and the willingness and ability of people to borrow) that matters. The lending, the willingness and the ability all point to further falls in house prices.

agreed,

+ welcome to our happy family forum

QE has enabled the BoE to keep the base rate at such an insanely low level but I don't think the QE money has found its way to Joe Public via mortgages.

Low interest rates and low volumes of property for sale is the reason for the current dead cat bounce in the property market.

i think it has in a magic money tree squeeze one end of the balloon kind of way, and you're right the govt has near zirped to get h p up for obvious reasons, looks doomed by basic fundamentals sooner or later

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The amounts paid for housing are a reflection of the amounts paid for land (locations) and land is in fixed supply.

I call it 'capture', because producers have no choice but to pay the owners of land any rising price to continue producing; it being not possible for them to create more locations to provide real supply competition for the cartel of owners. So, as production rises, the owners of sites are paid more and more from production without themselves either directly or indirectly being responsible for any increase in efficiency (they merely own sites). As a result, the benefit of increasing productive efficiency passes in a one way trade from the producers (who create it) to the owners of the sites on which they must work.

Real estate speculation is an attempt to stand downstream of this flow and simply 'capture' an increasing price producers are forced to pay in order to remain productive..the attempt also exacerbates the problem

Without getting into detailed arguments about Marxist economics, this argument does not apply here because we are discussing nominal prices, not relative ones. Your argument is about the value of land relative to the value of other assets, not the absolute money price of land. In fact, it may well be true that in this recession the value of land has risen relative to other assets, simply because the price of other assets has fallen faster.

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Very well put.

Thanks Freeholder. I was writing this as you posted, so didn't realise I was repeating more or less what you'd said. Your post about velocity of circulation is spot on.

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Without getting into detailed arguments about Marxist economics, this argument does not apply here because we are discussing nominal prices, not relative ones. Your argument is about the value of land relative to the value of other assets, not the absolute money price of land. In fact, it may well be true that in this recession the value of land has risen relative to other assets, simply because the price of other assets has fallen faster.

The value of land rises in terms of production because the amount of production that can take place on land rises with increases in efficiency, you can call this a rise in terms of other asset classes, but that's only an incidental fact. Once a stable pattern of economic growth develops, people speculate in a future price of land, a future production; which draws a theoretical future price into the present. People now bid for land not based on it's present productive potential so they can use it in production, but on its projected future price so they can charge someone else to do the same. The reason this is economically problematic is that present production relies on actual access to land and locations which cannot be created, so the drawing down of the future price of land only levies an increasing cost on production without returning any useful productive signal (nobody can make any more land) or aiding production. So production gets trapped in a cost spiral and people make money out of this spiraling costs without returning any service either in terms of production or information (a one way trade)

It has little to do with Marx - marx is one of the many fools that missed the distinction between this and investment in capital

Edited by Stars

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Without getting into detailed arguments about Marxist economics, this argument does not apply here because we are discussing nominal prices, not relative ones. Your argument is about the value of land relative to the value of other assets, not the absolute money price of land. In fact, it may well be true that in this recession the value of land has risen relative to other assets, simply because the price of other assets has fallen faster.

I don't know about other land types, but land for residential development has fallen about 50% since peak.

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The value of land rises in terms of production because the amount of production that can take place on land rises with increases in efficiency, you can call this a rise in terms of other asset classes, but that's only an incidental fact. Once a stable pattern of economic growth develops, people speculate in a future price of land, a future production; which draws a theoretical future price into the present. People now bid for land not based on it's present productive potential so they can use it in production, but on its projected future price so they can charge someone else to do the same.

What you have described here is the concept of asset pricing by the discounted sum of future cash flows. The reason it is not problematic at all is that this concept is of course applied to all assets and is not exclusive to land. It creates no distortion. Internet is full of incomplete “economics†with odd agendas, beware.

Edited by LazyDay

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Guest Daddy Bear
I have long been arguing that the Bank of England's purchase of gilts with printed money (so called quantitative easing - QE), has supported the UK bond market and that the Bank of England has effectively been monetizing the debt of the UK government. In my most recent post on the subject, I identified that overseas holders were selling gilts to the Bank of England, and that QE was supporting prices. In a slightly earlier post, I showed how the Bank of England rationale for QE made no sense whatsoever, and that it was just a cover for propping up the massive UK fiscal deficits. My criticisms of the policy date back to before it was even enacted, and I even predicted that it might be enacted as the fiscal situation deteriorated.

The fig leaf for such monetization has been that the action has been taken to prevent deflation. However, it is only now that the CPI measure of inflation that is targeted by the Bank of England has finally fallen below the target of 2%. Even now, it is just undershooting slightly at 1.8%. Even at slightly below target, it is difficult to see why such a radical policy of QE might be justified, as such a level does not even require a letter of explanation to be written.

I have returned to this well worn subject as yet more evidence of the necessity of QE to support gilt prices has emerged. In an earlier post I speculated that the Bank of England might be losing patience with the government's fiscal incontinence, and they have recently put on hold the possibility of extending QE beyond the original £125 billion of the original policy. The result is reported in the following from Reuters:

Government bonds tumbled on Thursday, propelling 10-year yields almost a fifth of a point higher after the Bank of England announced no increase to its quantitative easing programme.

With the economy still reeling after its sharpest contraction in more than 50 years, markets had widely expected the central bank to increase its asset purchases by 25 billion pounds.

Traders fretted that its decision to leave the target unchanged meant the Bank's unprecedented scheme to buy assets, over 90 percent of which have been gilts, may soon be brought to an end.

Ian Kernohan, an economist at Royal London Asset Management, said the knee-jerk rise in gilt yields gave some indication of the size of the QE premium in gilt prices.

"The problem will be how to exit the QE strategy without causing a significant back up in yields and the cost of funding the government's deficit," he said.

The September gilt future settled 1.45 points lower, sharply underperforming the equivalent Bund future which fell just 24 ticks.

The key part of this article is that the fall was not as a result of the Bank of England stopping QE, but as a result of no announcement of an increase in the QE programme. As some of the analysts described it, it appears that there was a belief that it was just a delay in the announcement of an extension of the programme:

Some analysts saw this as a hint an extension to the programme had merely been delayed until next month, when it will be able to explain its actions more fully.

"This probably does not sound the death knell for QE," said Philip Shaw, chief economist at Investec. "Rather we expect an increase next month, when the monetary policy committee will have the benefit of a fresh set of inflation projections," he added. The Bank indicated that it would slow the pace of its gilt purchases, buying just 4.5 billion pounds of gilts next week. Since April, the central bank has been buying gilts at a rate of 6.5 billion pounds a week - roughly double the rate at which the government has been issuing them.

It is apparent that even a hint towards an ending of QE is enough to set the markets on edge. The result is that Charles Bean of the Bank of England has since needed to offer hope to the markets by saying the following:

"We haven't paused on QE. We are committed to buying 125 billion pounds of assets that will take us through to August," he was quoted as saying.

"We decided last week there was no need to make a firm decision. and we could afford to wait. August is when we publish papers on the economy and it's a natural point at which to take stock."

It is apparent that the state of the gilts market is now largely being determined by Bank of England purchases, and this really is the monetization of debt that I have long considered to be the result of the QE policy. The fragility of the gilt market, and the necessity for QE to support the market have been revealed.

One of my regular readers has identified that Charles Bean is taking questions on the policy of QE and suggested that I ask him some questions about QE. At this stage, this seems the best way of seeing how the Bank of England might justify the policy. As such, I have sent the following questions.

1. Reuters has reported on the 9th July that, following no announcement of an extension of the policy of QE by the Bank of England, bond yields rose sharply. Bearing in mind that just the possibility of an end to the policy caused this reaction, does this not suggest to you that QE is propping up the Bond Market?

2. The CPI has finally dipped below the 2% target that the Bank of England uses in setting monetary policy, but is still not far enough off target to require a letter of explanation. I believe that the Governor of the Bank of England has identified QE as an untried unconventional policy with uncertain outcomes. Bearing in mind that, during all but the last week, CPI has not fallen below target, how can such an untested policy be justified? In particular, with monetary stability as a key aim, how can such an unconventional policy be justified?

3. With regards to exit strategies for QE, the Bank of England Quarterly Bulletin for 2009 Q2 states that 'Alternatively, the supply of reserves could be reduced without asset sales, through the issuance of short-term Bank of England bills.' Is this policy? If so, can you confirm exactly when and under what circumstances you will finally sell the gilts that have been purchased?

4. A secondary question as a follow on to question 3. If the purpose of QE is not to monetize government debt, then why would you not sell gilts at the end of QE policy? Do you have concerns that the existing expansion of gilt issuance would preclude the sale as the sale might destabilise the gilt market? Is this not recognition that the gilt market can not support the current level of issuance?

I do not know whether I will get answers, but it is certainly worth asking the questions. I will update you on any reply that is made. In the meantime, it is apparent that the Bank of England is locked into QE if it does not want a collapse in the gilt market. They are faced with the tough choice of supporting government irresponsibility, or seeing a gilt market collapse and the resultant fallout for the £GB. On the other hand, if they continue, the situation can only get worse, as the economy slides further down, and government borrowing continues to climb.

It is a tough position to be in. However, I hope that they might conclude that it is better to face the problem now rather than later, at which point it can only be far worse

They won't - and it will be far worse.

:D

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