The Construction Products Association has called on the Chancellor to pave the way so that quantitative easing can be exploited to fund house building.
The basic idea put forward by the association is that a public interest company of sorts be established to provide the vessel for the funding, (probably) issuing bonds or shares (depending on how the entity is structured) sold to the Bank of England.
This not-for-profit enterprise would then be able to buy land, establish relationships and finance house building and the necessary wider development.
The assets would at an appropriate point be sold to private owners or to not-for-profit housing providers and the funding returned to the Bank of England so that the liquidity originally introduced would be then taken out of the system. Quantitative easing is in many ways a more appropriate mechanism, but it was not on the agenda back then.
So as an advocate of the notion the increasing interest is encouraging. I am also optimistic that the notion will gain “traction” (as they say in lobbying circles) when the wider world recognises that house building numbers will remain subdued for many years yet.
But, while I am an enthusiast, it is worth saying that I have no illusions that it will be anything other than tricky to devise a workable system to channel newly generated money from the Bank of England into bonds to fund building homes.
But if we are not to waste one of the few opportunities of a recession – a standing army of unemployed skills – we need to take drastic action and quickly and rise above the obstacles.
Certainly the broad principal appears sound, if we set some clear ground rules and make some fairly reasonable assumptions.
In no particular order:
- There is currently an acute lack of finance to build homes.
- The market is delivering about half the numbers of new homes believed to be needed.
- There is huge need and a sizeable latent market demand for homes now, which will persist into the future.
- There will be a ready market in the future for homes that are built now.
- It is possible to hedge against extreme house price falls.
- All the homes built through the scheme would eventually be sold – either to the private sector or the not-for-profit sector.
- An increase in house building would have a huge beneficial impact on the general economy, directly and through the much-bragged-about multiplier effect of construction.
- Maintaining house-building skills now will avert a damaging skills crisis in the future.
- There is a very sizeable pool of unemployed labour.
- The Treasury will benefit hugely from increased employment and reduced benefit payments. My calculations suggest through this alone the Treasury might on average gain by more than £20,000 for each home built.
- Injecting money through the house-building route would see it flow more directly into economy than it is through the current asset purchase scheme.
- The house building QE scheme would be indemnified by the Treasury as are the existing asset purchases. While it could be argued that the scheme is riskier than buying gilts, the potential direct gains captured by the Treasury would appear to significantly outweigh any risk.
Yes, there are important details over tenure, locations, priorities, design, delivery and how the industry and the state interact.
But for all the problems there are a host of opportunities that this scheme might open up to deliver other important policy objectives that are currently floundering – not least to create ready-made housing packages designed to be attractive for institutional investors.
The Bank of England would also find itself with a useful weapon to moderate unwanted house price inflation as the economy picks up and demand rises and it finds itself able to sell into a market characterised by tight supply.
There are many ways one could devise a workable scheme. But as things stand this is not something that the Bank of England could sanction. It would need the Government to instruct it to take such a move.
This Mervyn King made very clear in a question from Linda Yueh of Bloomberg TV in the latest Inflation Report press briefing.(pdf)
Yueh asked: “…if you have a balance sheet recession where deleveraging is happening across the economy, including households, and in terms of corporates and banks even, why not get more creative? Why not, for instance, buy securitised loans? Why not inject more capital into perhaps even an SME bank, something which one of your colleagues Adam Posen has suggested?
“You know, why not try and address that aspect of lending more directly, rather than do quantitative easing through gilt purchases, which doesn’t seem to have really moved up credit by very much in the economy in the last few years?”
Her question in many ways embodies a growing frustration expressed by many about the asset purchase scheme. It does not seem to be getting money to where it’s most needed.
Indeed the Bank of England freely suggests that the most potent transmission mechanism of its current approach is through raising asset prices and lowering yields and decreasing the cost of borrowing, rather than through banks’ increased liquidity being used to boost lending.
King’s answer was very interesting. He said: “Well I think the simple reason is that that would be asking us to buy something that no one else in the economy wanted to buy, and that’s the definition of a subsidy essentially.”
On the face of it that suggests he is slamming the door.
But more interestingly he added: “The question is why would we want to decide which assets should be purchased rather than the market itself? Now if you can detect an example – which we did with small and medium sized enterprises – where they are being particularly harshly treated, where there is particular market failure, then there is an argument for intervention. But that’s an argument for giving a subsidy to that sector relative to the rest of the economy.
“That is something which the government should decide, not us.”
He is absolutely right. It is not the job of the Bank of England to determine how the money is spent. Its job is to ensure there is enough of it in the system and not too much to keep inflation, as best as possible, to target.
So as King says: “It is the role of the government to make a decision about a scheme that discriminates among different parts of the economy. We can act as the agent of the government, of course, but the decision on it and the terms on it have to be decided by government.”
Now I would argue that there is a market failure in regards to house building. I have argued for some while that we look condemned for a number of years hence to build far fewer homes than are sensibly needed. This will do lasting damage to the economy and to the welfare of a large number of the population.
Furthermore house building can be a very effect means to drag the economy from depression. It was, let us not forget, the main driver of growth that propelled the UK economy out of the Great Depression.
Chancellor George Osborne should give very serious thought to setting up a means by which the Bank of England can purchase “house building bonds” and encourage it to do so.
And in the meantime the industry at large might wish to rally behind the Construction Products Association and support its call for quatitative easing for house building.