Economic easing and the property market

Ben Russell discusses the implications of quantitative easing for the property industry and outlines what may happen now that artificial economic stimulation has ended

Over the course of the past three years, the property market has witnessed some historical movements. In 2007 we saw unprecedented growth with property prices hitting an all time high. In 2008, as a result of the credit markets virtually disappearing overnight, we saw property prices fall at levels similar to those witnessed during the early 1980s and 1990s.

In 2009, many breathed a sigh of relief as both the equity and property markets showed signs of stabilisation. The recent improvements in market conditions are the result of a number of factors including a period of historically low interest rates, the restriction in quality stock to the market and a relatively weak currency. However, these factors are arguably a side effect of the government’s quantitative easing programme introduced in March 2009. In the period since March 2009, the Bank of England’s Asset Purchase Facility (APF) has bought a staggering £200bn of UK’s fixed income securities. This is made up of £198bn of gilts and £2bn of corporate bonds.

The objective of this buying spree was simple: to boost the money supply into the economy, ease corporate credit conditions and to raise growth output. Whilst the overall stimulus to the UK economy remains questionable, with growth output only showing a 0.1 percent increase in Q4, it has, without a doubt, had some positive outcomes of which include stimulus to both the equity and property markets. Since March 2009 we have seen a sharp rally in the equity and property markets. The Monetary Policy Committee’s decision to buy up large quantities of government gilts has pushed up their price and reduced their yield on any given “coupon” or nominal interest. Unsurprisingly, this has lead to pension funds and investors looking for other investment strategies to enhance their portfolios returns. As such, they are investing a higher proportion into blue-chip shares or top rated companies. The equity markets are not the only sector to have gained, but so too has the commercial property sector.

The continued significant weight of money into this sector has pushed up prices and compressed yields. December 2009 marked the sixth month of increasingly positive yield impact and all Property capital values accelerated upwards and generated the highest monthly total return since records began in 1987. Worryingly, the rise in capital values has not been mirrored by similar evidence of rental growth. Monthly rental growth from all sectors remains minimal or indeed negative. This factor is of no great surprise as despite the recent economic recovery, growth still remains low and consumer confidence remains uncertain. The public remains cautious as to spending and therefore retailers continue to witness poor sales and are finding meeting their rent commitments a challenge.

The recovery in capital values has not only been assisted by institutions looking for better returns but also by the falling sterling rate. This is arguably a by-product of the quantitative easing programme, which has confirmed the poor state of the UK economy and therefore investor’s confidence has dwindled along with the value of the pound.

Subsequently, a weak pound combined with the early losses witnessed in 2008 has made UK property an attractive proposition to overseas investors. However, now that The Bank of England’s Monetary Policy Committee (MPC) has reached its £200bn target and in light of the UK economy having stopped contracting for the first time in 18 months, the MPC is under pressure to top the programme altogether or at the very least reduce the level of government gilt purchasing. Economists are now considering the impact this could have on both the economy and the property market, as here is widespread concern that the remarkable recovery witnessed is unsustainable and we are likely to witness a ‘double dip’.

One of the early concerns during the implementation of the policy was that it might work too well and therefore create hyperinflation. This initial fear seems to becoming a reality when we saw a rise in annual headline Consumer Price Index to 2.9 percent in December 2009. The Government, as a means to control inflation, is likely to review interest rates in an upwards direction together with raising taxes to restore public finances. The outcome of these measures could easily tip the economy into a further recession and wipe out the recent gains enjoyed by the property market.

Ben Russell is head of property investment at Quintessentially Estates. For more information visit: quintessentiallyestates.com