Does quantitative easing increase house prices?

Does quantitative easing increase house prices?
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The Bank of England has undertaken an extensive ‘quantitative easing’ programme over the past year in response to Covid-19. But what is quantitative easing? And how does it impact house prices? Let’s break it down.

House prices: How much have they increased?

According to Rightmove, the average asking price for a home now stands at an all-time high of £338,447. This figure has grown by more than £20,000 since the beginning of 2021.

So is house price inflation simply due to supply and demand, or is quantitative easing having an impact? 

What is the Bank of England?

The Bank of England is the UK’s central bank. It is responsible for setting the base rate – the interest rate at which banks lend to each other. It also exists to manage inflation, working with a 2% government-set target.

In 2009, following the financial crisis, the Bank of England lowered its base rate to 0.5%. It has since lowered it further to 0.1%. Lowering the base rate enables cheaper lending, which can boost house prices. See our article on what the base rate means for your finances.

What is quantitative easing?

Aside from lowering the base rate, the Bank of England introduced quantitative easing (QE) in 2009. This is where the bank buys government and corporate bonds. To date, the Bank has purchased £895 billion worth of bonds.

In layman’s terms, QE is another term for ‘printing money,’ even though it doesn’t involve printing physical banknotes. 

QE hit the headlines earlier this month following a report from a committee in the House of Lords claiming the Bank of England is ‘addicted to creating money‘. The report highlighted that the bank lacks a plan to unwind its bond-buying programme and noted that the UK spent £8.7 billion in debt interest payments in June 2021 alone.

Does quantitative easing affect house prices?

QE increases the amount of money in the economy. This means banks can lend more cheaply, meaning mortgages also become cheaper. Many believe that cheaper mortgages, coupled with the fact that the housing supply is essentially finite (as it cannot be easily expanded), places upward pressure on the cost of housing.

Critics of QE also claim that it leads to inflation, which can also increase house prices. For example, over the course of the pandemic, while the price of everyday goods hasn’t vastly increased, the prices of assets, including housing, have skyrocketed.

In other words, many feel that the Bank of England’s newly created money is feeding into property and the stock market. It’s making the owners of such assets richer, and those without effectively poorer. 

One reason for this may be because those who hold cash in inflationary environments are likely to see its value decrease. As a result, holding assets becomes more attractive, pushing up prices.

But isn’t inflation currently low?

The Bank of England has a duty to ensure inflation is as close to the government’s 2% target as possible. If inflation begins to take off, then the Bank should raise its base rate in order to cool the economy.

However, while house prices have increased 8.8% in a year, the Bank of England considers the current rate of inflation to be 2.5%.

That’s because it uses the Consumer Prices Index (CPI) to measure inflation. The CPI is calculated by looking at the prices of thousands of everyday items, from groceries to petrol. Crucially, however, the CPI ignores assets such as shares and house prices.

Critics argue that by using the CPI to inform its monetary policy, the Bank of England is able to keep its base rate artificially low.

It has been suggested that by maintaining a low base rate, the bank helps the government to service its debt, while simultaneously boosting house prices. High house prices may be seen positively among homeowners, who are more likely to vote than non-homeowners.

What else can affect house prices?

While the base rate and QE can massively impact house prices, there are other factors to consider too. A greater number of people looking for bigger properties can have an influence on prices. Government interventions, such as the recent stamp duty holiday, can also play a big part, fuelling the market.

To learn more, see our article on whether house prices have reached their peak.

Are there benefits of quantitative easing?

Aside from making it easier for the government to pay off debts, supporters of QE argue that the policy shortens recessions as an increased money supply makes it easier for firms to invest and employ staff.

Furthermore, while QE may be detrimental to the wealth of those who hold cash or earn fixed wages, the policy can be a boon for those holding lots of fixed assets, such as owners of multiple properties or those with significant stock portfolios.

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