QEDPosted: July 5, 2012
As the Bank of England unleashes another £50 billion into the economy is it time at last to use quantitative easing in a way that will boost the economy and tackle the housing crisis at the same time?
In essence, the idea is that the government should set up a not-for-profit public interest company with a remit to fund house building. The Bank of England would use £50 billion of housing QE to buy bonds in the company to fund the construction of homes and associated infrastructure and the bonds would be repaid from the rental and eventual sale of the homes.
In the process, the scheme would support other government objectives too:
First, and most obviously, it would help tackle the huge shortfall between housing demand and current provision (currently about 120,000 homes a year). If the scheme used public sector land, the QE would be enough to fund 500,000 homes at £100,000 each.
Second, it would stimulate an economy in recession. Within government, the argument is that 100,000 means a 1 per cent increase in GDP.
Third, it would benefit the public finances. Every home built during a recession means the Treasury is £20,000 better off in increased taxes and reduced benefits for the construction workers employed
Fourth, it could dovetail with efforts to get institutional investors into housing. Two of the key problems that the Montague report is expected to identify when it is published later this month are that the stock does not currently exist of a size sufficient to persuade pension funds and insurers to take the plunge and that there is nobody around to build them.
Fifth, it could be an ideal way of facilitating the construction of the new garden cities advocated by David Cameron in a speech in March.
Thankfully, the argument that quantitative easing could be put to more productive use is not falling on deaf ears. The emergency ‘funding for lending’ measures announced by George Osborne and Mervyn King last month are designed to provide an £80 billion boost to bank lending to the private sector but there could be a housing element to them too. The plan involves using the current ultra-low rate at which the government can borrow money to guarantee loans and so reduce interest rates for loans to companies.
The Treasury is also working on a plan to make it cheaper for housing associations to borrow money that could involve the Bank of England buying social housing bonds or the government guaranteeing their loans. Both amount to versions of QE for housing. Potentially, associations could be able to borrow at less than half the current bond rate of around 5 per cent. However, how much of this will be new money and how much simply a replacement for loans that banks no longer wish to make?
LSE economists Tim Besley and Tim Leunig put the case in the FT last month for a new role of housing association in issuing bonds underwritten by the government. In a short-term programme lasting two or three years they could be sold on to pension funds looking for long-term secure assets at fixed rates of interest or to the Bank of England if it widened the scope of QE. Associations would get homes built, then sell or rent them on the open market and offer mortgages to buyers.
All the evidence suggests that the government is now willing to look at innovative ways to boost growth and that it is – at last – taking housing seriously. Today’s announcement indicates that the Bank of England is still persuaded that conventional QE will somehow persuade the banks to start lending again rather than hoarding their cash, contemplating their next scam and counting their bonuses.
The case for an alternative is gathering pace all the time but will the government dip its toe in the water or make a big splash?