The following article was drafted by a property tax accountant to explain to the audience about Quantitative Easing and how it works. TaxCare Accountants does not take any responsibility if the contents are found to be misleading as the blog is purely posted for marketing purposes.
Although a lot of property experts argue that the reduction of stamp duty tax has helped to increase the price, however, others believe it is the Quantitative Easing that is the key driver to increase the house prices in the UK.
Quantitative easing is the injection of money by a central bank such as the Bank of England onto the financial system during an economic crisis. It is similar to printing a lot of money by the central bank to purchase government and corporate bonds from financial institutions such as pension funds. Quantitative easing was introduced by the Bank of England for the first time in 2008 during the financial crisis.
Generally, a lot of the governments around the world including the UK government borrow money by issuing government bonds or government’s gilts to the financial market. Investors trade these bonds on the financial market regularly. When there is an economic crisis, central banks such as the Bank of England produce a lot of digital currency (similar to printing cash money) in order to buy these government bonds from the financial market. For instance, the Bank of England buys £5 million of government bonds from a pension fund. In place of those bonds, the pension fund now has £5 million in cash.
As a result of this, the price of these bonds tends to increase which means that the bond yield, or ‘interest rate’ that holders of these bonds get, goes down. This helps financial institutions such as banks to have a lot of cash to lend to the public. It also helps to decrease the interest. For example, the price of a government bond is trading at £1 with a 3% fixed interest rate (coupon) in the financial market. If the government purchases this bond from the market at £1.20 then the interest rate will be reduced to 2.5 % (3%/£1.2). Therefore, the interest rate is reduced by .5% because of the increase in bond price (from £1 to £1.20).
When there is a lot of cash that is held by financial institutions such as banks they tend to lend more money to the public. If the interest rate is very low and lending such as mortgages are easily available to the public then the demand for assets goes up too. Higher demand means higher prices. This stimulated demand drives property prices to increase dramatically. House prices in the UK were increased by almost 10% in 2021 although the Covid-19 pandemic was hitting the country high.
The latest data shows a slight correction in house prices. For example:
While QE has stimulated the housing market, the recent reversal of such policies, coupled with higher interest rates, is moderating its effects on house prices.
Quantitive Easing is one of the most controversial financial stimulation methods that was introduced by the Bank of England in 2008. Since then Bank of England has injected almost £895 billion to the economy. It’s also been used in countries such as the US, Euro area and Japan.
QE affects the price of shares and the properties. Therefore, rich investors are the key beneficiary of QE. Although it helps the economy to remain stable, however, it does not helps the mass population. It can lead to an unequal society where people who owns the assets will be benefitted the most from the QE.
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