So, the Government decided to continue with its program of quantative easing, pumping another £25bn into the UK economy, taking the total amount of QE so far to £200bn.
As JP Morgan analyst Harm Meijer has been pointing out for a few months, it is the amount of liquidity being created in the wider financial system that is mainly responsible for the recent sharp rise in prices:
In a world in which it seems almost every 'light' is engineered on 'green' and appears likely to stay that way for a while, we believe property prices will be boosted by government/bank policies - much more strongly than most market participants currently appear to expect and perhaps even more strongly than some can even imagine.
"Indeed, we forecast real estate values in the UK to jump by 10% in the next 12 months, albeit to unsustainable levels, and those on the continent to stabilise. Yield compression is back; we forecast a 100bp reduction for the UK.
But be warned, there are risks:
"In essence, our view is that future profits are being brought forward by the policies, building a highly vulnerable property market with a small margin for error."
A further note of caution has been sounded by investors with an eye on the macro view. One fund manager I spoke to this week pointed out that conversations they had had with senior figures in the bank of England pointed out the dangers posed once the Government turns off the taps.
In particular, they said, everyone seems to be forgetting that, as well as QE, UK banks have been provided with more than £185bn of funding through the Bank of England's special liquidity scheme. That, under the current terms, is due to be paid back by the end of 2010, which will put pressure back on banks to find alternative sources of funding.
Those helpful 'extend and pretend' refinancings might be a bit more difficult to come by once the banks can no longer rely on Government funding.
Leave a comment
What a user pic? Get a Gravatar!