Leading economist calls for additional quantitative easing as latest figures show UK property hit

Prices fell by 0.7% in October and the three month figure fell to 1.5%, the sharpest three month decline since April 2009, data from Nationwide shows.
 
The average property now costs £164,381, some 1.4% lower that in September 2009 and 3.4% lower than this year’s peak in June. If the current rate of decline continues then property prices will end the year down by 1%.
 
Martin Gahbauer, Nationwide’s chief economist described the decline as ‘modest’ as it is still well below the 5% to 6% rates of decline seen during the second half of 2008. But he acknowledged that some kind of stimulus would be welcome.
 
‘Additional quantitative easing could have the impact of raising inflation expectations, which in turn could encourage investors to divert more money from cash holdings into property-related assets,’ he said.
 
‘The strength of these effects is very difficult to quantify, and it is impossible to say at this stage whether additional quantitative easing would fully offset the various headwinds currently facing the housing market, including the impact of the measures announced in the Comprehensive Spending Review. On balance, however, it is reasonable to expect that a resumption of quantitative easing would provide some offsetting support to the housing market,’ he explained.
 
The October minutes of the Monetary Policy Committee (MPC) meeting pointed to increased debate about whether or not it would be appropriate to initiate a second round of quantitative easing in the near future. Should the MPC decide to follow such a course of action, it is worth considering what impact it might have on housing market activity and prices, he added.
 
‘Quantitative easing has the effect of lowering the cost of government borrowing. Since the cost of fixed rate mortgages is closely linked to the interest rates on government bonds, the policy would contribute to lowering the cost of borrowing for homebuyers taking out new mortgages. The cost of two year fixed rate mortgages has in fact already come down noticeably over the last year, partly as a result of markets anticipating additional quantitative easing by the Bank of England,’ Gahbauer said.
 
‘Quantitative easing is implemented by purchasing government bonds from investors with newly created money. To the extent that this money is then reinvested in bank debt or mortgage-backed securities, it could have the effect of improving wholesale funding conditions for UK banks and making it easier to refinance the large amount of government backed funding expiring over the next several year,’ he added.
 
But in general the latest housing market data and surveys have been consistently weak and the housing market really does not seem to have got much going for it at the moment, according to Howard Archer, the chief economist at IHS Global Insight.
 
‘Critical to the development of house prices over the coming months will be the amount of houses coming on to the market, mortgage availability and how well the economy and jobs hold up as the fiscal squeeze increasingly kicks in,’ he said.