Speculation is preventing a generation from becoming homeowners
The news that private equity firms are buying up residential property has angered a lot of people. In a bidding war with the money men, ordinary people aspiring to become home owners don’t stand a chance. It is a perfect example of how big corporations are allowed to distort markets, crushing individual interests under the weight of their immense purchasing power.
However, it’s not just the big investment companies they’re up against. Central banks — which are meant to act in the public interest — are also helping to drive-up property prices. Why?
The culprit here is ‘quantitative easing’ or QE. Essentially, central banks like the Federal Reserve in America and the Bank of England create money out of thin air and use it to buy up government bonds. Artificially increasing demand in this way lowers the cost of borrowing — thus enabling cash-strapped governments to borrow more.
However, in order to stimulate the wider economy, QE is also used to buy up corporate bonds and other private sector assets. Again, the idea is to reduce borrowing costs — in this case, for businesses. If employers can keep going through tough times then, hopefully, we’ll avoid a 1930s-style great depression.
All this comes at the cost of market distortion. A particular problem, noted by John Authors in a briefing for Bloomberg, is that central bank purchases include mortgage-backed securities:
It’s a really good point. While a crash in the housing market would be disastrous for the post-Covid recovery, there is not much chance of that happening right now. Not even Covid has been able to halt the inexorable rise in house prices, so why intervene to pump even more money into the system?
In the UK, the Bank of England also uses QE to purchase corporate bonds — and the list of eligible bonds includes those issued by a number companies in the “property and finance” sector.
As in any market, house prices are a function of both supply and demand. To make houses more affordable we need to increase supply by building the things. However, not artificially boosting demand from major property investors would also help.
We should always remember that houses should be homes, not investment products. The state — which is supposed to be on our side — must stop bankrolling the speculators.