Friday, 26 May 2017

Money and mind-set

From: Inside edge

As the Bank of England monetary policy committee meets to consider its next move, how about some quantitative housing to go with the quantitative easing?

Last month the MPC added another £75bn of QE to the £200bn it committed in 2009 and 2010. Broadly speaking, the idea is to buy UK government bonds to lower the yield, bring down long-term interest rates, make borrowing cheaper and get the economy moving again. 

The side effects are an increase in inflation in general and asset prices in particular. Lower long-term interest rates means cheaper mortgages which feed through into house prices higher than they would otherwise have been - amplifying the effect of an artificially low base rate.

The winners from QE are bankers, London and the South East and people with shares and houses. The losers are savers who continue to get miserable returns, people about to retire whose pensions will be worth much less, would-be first-time buyers who cannot afford to get on to the housing ladder and private tenants facing soaring rents. Anyone on benefits will lose out too if the government goes ahead with plans to abandon the automatic uprating of benefits to inflation (CPI last month was 5.2 per cent).

So, with the MPC due to announce its decision on interest rates and QE later today, what’s the alternative? 

To state the blindingly obvious, how about something that creates jobs and growth, stimulates the supply of something that is desperately needed and holds down house prices too? 

Take last month’s £75bn. One month’s QE would be enough to build 750,000 homes at an average cost of £100,000 per home. 

The idea of an alternative QE is not new. The left-leaning think- tank Compass suggested QE for a Green New Deal in its economic Plan B at the end of last month with investment in job-creating energy efficiency measures for existing buildings (in contrast to the FiTs fiasco).

The economic historian Lord Skidelsky has proposed developing the government’s existing idea of a Green Bank into a full-fledged National Investment Bank able to borrow money to invest not just in green projects but housing, transport and small business too. 

Brian Green has been quietly pushing the idea of QE for housing on his Brickonomics blog for the last three years. Last month, he refined it with a £50bn plan to build 500,000 homes and net £10bn for the Treasury into the process.

The idea is a new form of QE where the Bank of England buys bonds in a time-limited Public Interest Company with a remit to build homes that it will in future sell on to the private or social sectors. 

The £10bn for the Treasury comes from the jobs created. Every unemployed construction worker put back to work nets the Treasury £25-£30,000 in benefits saved and taxes generated. The Home Builders Federation estimates that every home built creates 1.5 jobs directly and twice that number in the supply chain, so £10bn (£20,000 x 500,000 homes) is a fairly conservative estimate.

Even if all of the homes were at market rents, or all of them were eventually sold, the gains would be huge at a time when there seems little prospect of the market delivering enough new homes to meet demand. Rents could pay any interest in the short term and future sale proceeds could go back to the Bank of England.

Compare that to what we have now: housing starts at half the level required to meet demand; a generation of young people priced out of the housing market; soaring rents and a soaring housing benefit bill. 

It seems such a no-brainer that you think there must be a catch. Wouldn’t it just increase the deficit? No, because it wouldn’t count as public borrowing - and in any case the package of homes could be designed to deliver a rental income in the short term and more than repay the bonds in the long term.

The Bank of England would object to moving outside of its financial comfort zone. The government would object to anything that smacks of a Plan B and financial sleight of hand but will it come up with any better ideas in its growth strategy later this month?

What stands in the way of this idea this is not money but a mind-set. And it has to be a better bet than the Plan A-Plus advocated by the CBI yesterday to land people with more expensive mortgages just as we go into a double dip recession. 


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