Interest rates are down to 0.25% how low can they go?
“Property better investment than pensions”, says Bank of England Chief Economist. But what about the housing crisis?
The chief economist of the Bank of England, Andy Haldane, has recently claimed that property is a better investment for retirement than a pension. As long as the Bank of England continues on its current policy path this will most certainly be the case – with even more inequality and higher house prices to boot.
The Bank of England’s policies are concertedly aimed at lowering interest rates. These lower rates mean lower returns on savings and investments in pensions. With much more attractive returns on property, money is being re-directed away from savings and pensions into property. Indeed, this is one of the main reasons why Prime Minister May recently suggested that the Bank of England’s policies increase inequality.
The problem is that as more money is directed towards property, demand for property goes up, which ends up raising house prices. Higher house prices increase the wealth of existing homeowners; whilst making it even more difficult for first-time buyers to get on the property ladder.
In sum, the Bank of England’s policies aren’t only hurting pensioners and savers but also increasing inequality and worsening the current housing crisis.
Property better than Pensions
When recently asked whether pensions or property are a better investment for retirement, Chief Economist of the Bank of England, Andy Haldane said:
“It ought to be pension but it’s almost certainly property. As long as we continue not to build anything like as many houses in this country as we need to meet demand, we will see what we’ve had for the better part of a generation, which is house prices relentlessly heading north. I would quite like the day to come when that wasn’t the case…”
Currently, property might be a better investment than a pension. There is also good reason to believe that we are not building enough houses to meet demand, but this fundamentally ignores that the Bank of England is pro-actively helping stoke up demand for property.
Quantitative Easing and Demand for Property
It is well known that by lowering its main monetary policy lever – the overnight interest rate, this will ripple through financial markets and lower interest rates across the board. Lower interest rates mean lower returns for savers and pension funds, making pensions a less attractive place to put your money – hence the desire to invest in property.
However, what is often completely ignored is how the Bank of England’s £445 billion quantitative easing (QE) programme reinforces this process. This is because, through QE, the Bank of England creates new money out of nothing to buy government bonds from financial markets. Government bonds represent the safest investments (also known as safe assets in technical jargon) on the market. Indeed, pension funds tend to invest in government bonds because they are the investments that represent the lowest risk.
By buying billions of pounds worth of government bonds, the Bank of England concertedly reduces the amount of available safe investments. With very few government bonds to invest in and with very low returns, it is natural for people to look elsewhere to put their savings (i.e. property).
So in effect, the Bank of England’s policies help make pensions and saving an unattractive investment and, naturally, investment in property is a better alternative.
With more people wanting to invest in property, demand for property goes up, and house prices increase.