Saturday, 18 July 2009

Quatitiatve Easing: Alchemy at work


If house prices are stabilising, this is one of the signs that low interest rates and quantitative easing are working. Now the question becomes...when to stop? How to prevent hyper-inflation and not a double dip bust?

This is no mean feat and and one that will require much thought and swift policy. Sadly, we have a regulatory mess and a fag-end Government, so I don't give us much chance. The alchemy of money for nothing to boost a housing bubble is a nasty brew.

14 comments:

Paul said...

With so many MPs wth their snouts in the trough double-dipping on second and third properties, is it any wonder that they feel the need to prop up high house prices at the cost of a stable economy?

I'm astonished the media haven't yet blown the whistle on the Bank of England's attempts to chase high house prices with QE.

Aren't the current attempts to get house prices rising simply another example of the power-holding baby boomers trying to ride subsequent generations for as much money as they can?

Certainly looks that way. "To hell with sustainabile economic and fiscal policy, I've got a property empire to look after".

Elby the Beserk said...

Brown made it quite clear early on in the crisis that he intended to repeat what brought it about saying that he wanted lending to return to the levels of April 2007.

At least he is honest in this, in that he admits that as an economist he is a charlatan.

The thing to remember is that he doesn't give a flying fuck about we the people. We are just a means to an end.

Mark Wadsworth said...

CU, I'm puzzled...

1. House prices aren't stabilising, it's called a spring bounce.

2. Sure, home builders are selling a few more properties than a year ago, see above, also the fact that they've dropped their prices by up to a third.

3. QE is pure spin and doesn't really change anything of substance, it had a mild positive impact on bond prices, that's all.

I'm with Paul on this one.

CityUnslicker said...

Mark, Paul, Elby

a) I said if
B) I know they dropped their prices, I bought one. Sales are still momentum. More houses are being sold, I think there will be a further decline in prices, but QE and ZIRP interest rates has prematurely ended the fall. House prices should have fallen 50% top to bottom, as I think we agreed ages ago. Now they may end up 30% - which is why Paul's baby boomer thing is spot on!
3) It does change things, The government is relying on QE to fund the public sector, whose employees are in turn able to carry on as normal and consider buying house etc. Now we are on this road I don;t see how it ends, The BOE will own all the gilts...the emperor will have no clothes!

( I do see how it ends actually, another big currency event).

the ginger bearded one said...

People have to buy houses - to get away from home, to get the kids into a good school, to downsize, to get extra bedrooms whatever. And while they may have held off for a year they can't hold off forever. Hence the bounce.

It's not a sign of anything except desperation.

But the house price bubble is all the government have for an economy, so who can blame them for trying to reflate it.

electro-kevin said...

Our egos are tied up in our houses.

We grade ourselves and are judged by the buildings in which we live rather than who we are. Even the cars we drive are no longer such a reliable status symbol as our housing.

mutleythedog said...

I live in a no bedroomed flat...

Nick Drew said...

CU - yes, currency event, Extend-&-Pretend is predicated on AAA

Demetrius said...

There may have been distortions built in to the markets in recent years. In my patch there has been a huge number of flat developments many of which have entailed losing family houses. There have been family houses built, but not enough to compensate for the losses. But the governments numbers targets have been met. However, if swine flu kills off enough pensioners, then the supply may well increase enough to depress prices again.

JonCatalán said...

I cover a similar topic in my blog post ( http://www.economicthought.net/?p=37 ). Many prices are "stabilizing" because of the massive inflation of the money supply. The commercial housing market is still falling. Ultimately, these misallocations caused by the enlargement of the money supply will lead to another credit crunch in the near future (just like it did during the 1930s).

Anonymous said...

You can't have 10% of households losing their income and still house prices stabilising at a high level.

Fact is what we have seen is partly a Spring bounce and partly lower prices sucking in mugs with money that were sitting on the sidelines. They will get their fingers burnt at the end of the year as unemployment continues to rise.

Mark Wadsworth said...

Elekto-Kevin makes good points:

"Our egos are tied up in our houses. We grade ourselves and are judged by the buildings in which we live rather than who we are. Even the cars we drive are no longer such a reliable status symbol as our housing."

I rent a £700,000 house and drive a £2,000 second hand car. My wife cheerfully admits that her main factor in deciding which house we eventually buy is whether her friends will be jealous when come round to visit, and I can't say I'm entirely immune from this.

But that's capitalism for you - buying things you don't need, with money you don't have, to impress people you don't like.

electro-kevin said...

Excellent, Mark. Really excellent !

Blue Eyes said...

Wasn't that Fight Club?

My mortgage interest is still cheaper than renting even though I bought at the peak and renting is now in a trough.

Can anyone please tell me what the "correct" level of house prices should be? Can anyone please tell me what proportion of the house price boom was down to the collapse in inflation thanks to Thatcher/Majorism?

Lots of new flats still being thrown up near me, and most of them look like they are being sold. Plenty of my peers are buying or are looking to buy.

I sometimes think that there is a whole seam of political commentary who would actually like to see the economy collapse back to subsistence levels.