Until that time, residential construction had been heavily subsidised, mainly via interest subsidy. The interest subsidy meant that the central government guaranteed a low interest rate. During the 1980s, inflation was high, which meant that it was not only cheap to borrow, the loan in principle paid itself off. If the capital investment appraisal were to prove wrong, the local authorities often supplied generous guarantees. The risk entailed in a housing investment was therefore in practice moved from those who built the housing to the taxpayers3. In connection with the crisis at the beginning of the 1990s the interest subsidies were reduced and the public sector ceased providing guarantees for housing investment. This meant that it was no longer so attractive to build housing (Figure 4). Construction has picked up again since 2000, as house prices have risen. However, the response of new construction to price increases has nevertheless been surprisingly slow. One reason for this is that it may only be profitable to build in metropolitan regions and there may be a shortage of space for new building here4 Moreover, it is not unlikely that rent regulations have reduced interest in building new rental properties, which has channelled the household sector’s willingness to pay for housing towards houses and tenant-owned apartments. We thus have a situation where households have had a good increase in income, combined with the fact that it has been inexpensive to borrow, while there has been only a small supply.
But sadly it is a phrase that we are now well and truly stuck with. Like a lot of our operations, Quantitative Easing can seem a bit mysterious and confusing to those not steeped in what central banks do. As much of this confusion arises from a misunderstanding of the Bank of England’s accounts, I am therefore delighted to be speaking to an audience of accountants, who might find this arcane subject rather exciting! In January this year, the Chancellor authorised the Bank to create a new fund – the Asset Purchase Facility – for the purpose of buying assets from the private sector. Any profits on the Asset Purchase Facility are passed to Her Majesty’s Treasury, while any losses are also indemnified by the Exchequer. The accounts are therefore not consolidated with the Bank’s own accounts, as the Bank has no economic interest in the fund. Initially, the Facility purchased commercial paper, funded by the proceeds of sales of shortterm Treasury bills by the Debt Management Office. This asset swap took credit risk onto the public sector’s balance sheet and was therefore more akin to a fiscal operation. But since March, purchases have been on a much larger scale and funded through the issuance of central bank reserves rather than Treasury bills. The bulk of the purchases have been of government bonds, though a small quantity of investment-grade corporate bonds have also been bought.