by Peter Franklin
Friday, 9
July 2021
Explainer
07:00

Why can’t anyone afford property? Blame central banks

Speculation is preventing a generation from becoming homeowners
by Peter Franklin
ECB President Christine Lagarde speaks with US Chairman of the Federal Reserve Jerome Powell. Credit: Getty

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: 

High home prices are causing deep and justifiable intergenerational resentment… So why on earth is the Fed continuing to buy mortgage-backed securities when loan rates have never been cheaper? It diverts money into housing, and serves little purpose beyond distorting outcomes…
- John Authors, Bloomberg

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. 

Join the discussion


  • Keep fighting the good fight Peter. QE must have been the biggest elephant in the economic room ever since the taps were turned on in 2008/9, it’s astonishing how there’s still so little discussion of it.

  • Cheap and too abundant credit is the cause of property booms. When building societies had a near monopoly of lending for domestic property they applied strict income to borrowing criteria. They were also funded by their investors savings. Both of these acted to dampen any exorbitance in house prices. When I bought my first property I asked the building society I had saved my deposit with for a mortgage. The sum I wanted was well within the multiples of my income however the building society had to inform me they had run out of money. My mortgage could be granted but I would have to wait about six weeks while the society’s investors deposited they spare fivers. It was a fairly common experience in those days characterised as a mortgage famine. Nowadays money is created by some witchcraft on a computer screen and there is no restraint on the money available to fuel an overheated market.

  • This is happening in the UK too, and is what happens when governments capitulate to those who shout the loudest.
    For as long as I can remember, there has always been a noisy minority insisting that house prices were about to crash, or needed to. This was the case even during the long slump of 1989 to 1996, when there were people insisting the market needed to fall more. In almost every case, the party who predicts a crash does so not because one is objectively likely, but because they want one. They failed to buy in earlier, and now need a crash in order to do so, at the previous cheaper price.
    Who they blame for this situation changes over time – the Chinese, yer Tories, Jews, Bilderberg, oligarchs, Mark Carney, and so on – but buy-to-let landlords became a favoured target. If landlords could be forced to sell, the houses wouldn’t disappear – their tenants would simply be replaced by owner occupiers, went the argument.
    So the government swallowed this and has been attacking landlords for about 10 years now, with the result that they are exiting the sector and reducing the rental supply. This is exactly what the “crash trolls” and landlord-haters were looking for, but has it brought about the desired price reduction? Have tenants seamlessly become owners?
    Reader, of course not. And here’s the rub. You can get fourteen tenants into a five-bedroom house, but when the landlord sells it, it will be to a family of probably only five. So there is one fewer property to rent, hence a net nine evicted tenants looking for a new rental in a rental market that has just shrunk. The occupation density “exchange rate” between renters and owner occupiers is not one for one. It’s more like four for three, meaning the rental sector, if somehow sold to private buyers, would house 25% fewer people than it does now. Not only do tenants not get to become owners, but their rent goes up, thanks to policies they thought they wanted.
    What now seems likely to happen is increasing corporatization of renting, and its domination by major corporate landlords as they move in to grab a juicy opportunity created by successive government mistakes. So in future, if you miss your rent, not only will your corporate landlord evict you, but you will also never be able to rent privately again. You will find that you agreed, at the outset of your tenancy, that your payment history can be shared as a reference among all such landlords; and none will have you.
    I don’t know what the solution is, but it certainly isn’t more state interference; meanwhile, I am very glad I am long property.      

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