Tuesday, 03 March 2015

QE for housing

From: Inside edge

The Bank of England seems set to announce another round of quantitative easing on Thursday. Is that good news or bad news for housing - and is it time to consider an alternative?

QE is presented as the Bank’s only option for stimulating the economy given that it has already cut interest rates to a record low of 0.5 per cent. To simplify massively, it creates liquidity by creating money to buy assets like government bonds. The institutions holding the bonds then have new money in their accounts, which they use to buy other bonds and shares. The net effect is to reduce long-term interest rates and stimulate the economy.

The scheme boosts asset prices and increases inflation but that is seen to be a price worth paying for getting the economy out of the hole it fell into after the collapse of Lehman Brothers. The Bank released £200 billion of QE in 2009 and 2010 and another £75 billion in October. Following figures last week showing  a big fall in the money supply it is set to do more on Thursday.

But what about the effect on housing? QE is generally credited with putting a floor under house prices, which is good news if you already own a home but very bad news if you are struggling to get on to the housing ladder and paying a high rent. House prices, remember, are already propped up by ultra low interest rates that have reduced mortgage payments by thousands of pounds for anyone who can raise a deposit.

The problems don’t stop there. According to the Bank’s own analysis QE has increased the rate of inflation by between 0.75 and 1.5 percentage points. That has led to direct increases in rents for social tenants because they are linked to a formula of RPI inflation plus 0.5 per cent. If QE had never happened, landlords around the country would not need to be imposing such large rent increases at a time when their tenants are already suffering from falling incomes.

So what’s the alternative? It’s one I’ve mentioned before that is slowly gaining some traction. What if quantitative easing could be used to invest in new homes rather than buy financial assets?

Instead of government bonds, the Bank could buy bonds in a public interest company with a remit to build homes for future sale to the private or social sectors. A public interest company would be at arm’s length from the government and therefore not caught by restrictions on public borrowing. remit not to hold

A £50 billion scheme could potentially finance 500,000 homes, create 20,000 jobs and generate £10 billion for the Treasury in taxes generated and benefits saved without taking account of the knock-on effects for the wider economy. Rents on the homes could pay any interest in the short term and in the longer term the sales proceeds could go back to the Bank.

The scheme could be tied into some of the innovations in housing finance being developed by social landlords. It could generate the type and scale of stock that institutional investors say they need before they take the plunge into the private rented sector and be a way for the government to de-risk private rented investment without using public money. It’s surely also a good way of using the precious resource of public land.

The obvious objections seem to be more ones of mind-set than substance. A backdoor scheme for increased borrowing? Not if all the money was repaid on the sale of the properties and it generated a healthy return for the taxpayer in the meantime.  Wrongful use of a scheme intended purely for financial instruments? It may be difficult for the Bank to move outside its financial comfort zone but it would still be buying financial instruments and this would give the Bank a more varied range of assets to sell when the time comes to unwind QE.

Above all, perhaps, there seems no chance of the government achieving its ambition of using housing as a key part of its growth strategy without an extra weapon like this at its disposal. Brian Green argues on his Brickonomics blog that the scheme could be just the ‘big bazooka’ that Grant Shapps needs to stand a chance of meeting the target against which he said he wanted to be judged: building more homes than Labour. He also has more detail about how a public interest company might work and roles for the Bank, Treasury and HCA.

Without something like QE for housing, we seem stuck with housing completions at half the level needed to meet demand (even in 2016 Savills is predicting just 125,000). With it, and with the right approach to land assembly and managing the construction programme, we stand a chance of building the homes and delivering the growth we need.

The scheme has just won the backing of one of the leading trade bodies in the construction industry. The Construction Products Association, which represents the firms that make the materials and products that go into new homes, says it will be writing to the Chancellor to point out the advantages. Time for housing organisations to do the same?

The details would need to be worked up by people with more financial expertise than me. It’s possible that there is a fundamental flaw that I have missed. But doesn’t a QE that builds homes and creates jobs sound a hell of a lot better than a QE that boosts house prices and raises rents?


Readers' comments (7)

  • F451

    The problem with that idea Jules is that it takes all the worst effects of QE and PFI together to create some kind of super debt monster that will no doubt be trained to eat tenants in the future.

    QE as a global accounting tool is a brutal measure that looks gentle. The invention of money to fill the hole left by the removal of previously invented money has to be reversed when other methods of invention are found. This is the safety mechanism for the Bank, in that it can decreate what it invented such that fiscally it never existed - thus avoiding the Zimbabwe or 30's Berlin style crisis.

    However, the real world use of this imagined money means a borrowing premium will be charged and someone will have to pay that. In part the extra inflation fills some of that requirement; but this causes housing, for instance, to become less affordable, especially against falling wages, which is the other effect of QE.

    Now taking that and using the invented funds to support the borrowing for house building may sound a great idea, but at what cost, especially as for QE to be completed the funds given rise to must be recovered. From who - tenants? No, so a long term borrowing profile will be needed, and in order for that profile to be able to refund QE a PFI style payback will be required.

    So no Jules, in the name of sustainable and affordable housing, take QE away - even better, shove it where the Shapps don't shine.

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  • Jules Birch

    Thanks for the comment F451. I think what you're missing here is that another round of QE is going to happen anyway - probably this morning - so the first question is whether there is an alternative to something that in housing terms inflates house prices and rents.

    QE is not borrowing in a conventional sense so as I see it there is no reason why this should turn into a PFI-style debt monster. It's a way of creating liquidity - and in this case new homes - that would otherwise not exist.

    This QE would be underwritten by the Treasury in the same way as conventional QE already is. When the time comes to unwind it, the Bank's bonds would be repaid from proceeds on the sale of the homes. However, the Treasury is also getting back 10-15 per cent of the sum through increased taxes and reduced benefits, more from any multiplier effect in the economy, and more from any rents charged on the homes before they are sold. In the meantime, also, councils and government departments could get any proceeds from any public land used, rather than have to hand it over to housebuilders on a build now, pay later basis.

    When the homes are eventually sold, the buyers could be private individuals, institutional investors, property firms or social landlords. But social landlords would pay for them in the same way that they pay for new homes now - through a combination of grant (if any) and borrowing and their own resources. No extra PFI-style borrowing involved.

    This isn’t meant to be a backdoor way of borrowing for new social housing via a method that costs more in the end but simply a way of creating more new homes (of whatever tenure) that will otherwise never be built. I may well still be missing something but I think the bigger issues could be to do with managing such a large programme, land assembly and building the right sort of homes in the right markets for the right buyers.

    It’s not the only real-world alternative QE plan being put forward either – both Compass and the Green Party have called for a Green QE energy efficiency programme.

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  • F451

    True Jule, but my view is based on the fact that before the QE 'invented' money can be cleared from the books it needs to be balanced with real money. Thus the 'investment' still needs to produce a return to balance the 'capital'.

    Imagine the mechanism that this government would use if it were tenants funding that return - hence the PFI comparison.

    You are right that it will happen anyway, and as usual the invented Billions will somehow disappear, with the people paying the return through lower income and higher prices.

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  • Jon Southall

    Sorry Jules - did you just write that building homes via QE would 'create liquidity'?

    It will take many many years before there will be proceeds from the homes - which I think converts your QE into something rather more, solid, I would say. And that would defeat the object.

    Compare the liquidity of shares and bonds with the liquidity of building, waiting for a return and then finally releasing the proceeds; I think this will be unattractive to the bank, and potentially more dangerous to the economy.

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  • Jules Birch

    Not sure if it's a good sign or a bad sign that you two seem to be agreeing with each other for a change!

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  • Jon Southall

    Maybe a case of a Rawlsian 'overlapping consensus' methinks Jules!

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  • F451

    We often agree - but do not always realise it!

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