8th November 2011
Today I wish to look at the UK housing market and consider the implications from its behaviour for the rest of the economy. Lest we forget recoveries from recessions are usually not only accompanied by an improving house market but are in fact at least partly driven by them. A recession is ordinarily followed by a cut in official short-term interest-rates which stimulates mortgage demand and thereby stimulates the housing market. More activity in the housing market then helps to boost the economy which then helps to improve the housing market and hopefully so on…
The Bank of England has tried to help
In the credit crunch we have seen the first part of this operation as the Bank of England cut official short-term interest-rates from 5% to 0.5% in response to the problems which built up in late 2007 and 2008. In addition the Bank of England adopted a policy called Quantitative Easing where it purchased mostly UK government bonds in an attempt to reduce longer-term interest-rates. Its initial effort eventually involved some £200 billion of such purchases and at its October meeting it decided to purchase an additional £75 billion of which by the 27th of October it had bought some £14.63 billion of this. Actually that number is a little misleading and out of date as the Bank is proceeding with its purchases at a fast rate and as an example of this it plans to buy some £1.7 billion today.
There is debate over how much influence this has had on longer-term interest-rates but as we have been in a situation where in many countries they have declined – even if there is/was no such QE programme there- for this purpose it does not matter. Last night the UK ten-year benchmark gilt or government bond closed with a yield of 2.26% and this compares with 3% a year ago and 3.84% in November 2009. So we can see that longer-term interest-rates have fallen meaning that orinarily we would expect cheaper fixed-rate mortgages which should help stimulate the housing market.
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