In a previous post called Explaining Fiat Currency With A £150,000 Pokemon Card! we looked at how the creation of fiat currency (pounds, dollars, euros, etc) causes the purchasing power of that currency to go down. If you are unfamiliar with this topic, I would recommend reading that post before this one.

What Is Quantitative Easing?

Quantitative easing (QE) is the creation of additional money by the central bank of a nation to buy bonds or other financial assets as a means of stimulating the economy. When new currency is created, it reduces the value of existing currency. This new currency therefore pushes prices up.

In this short video, the Bank of England explains that they don’t even print up this money, instead simply adding a few extra zeros to their online accounts:

Following the recession of 2008 there has been a number of rounds of quantitative easing.

In June 2020, the Bank of England undertook a £100bn round of QE. This is a chart that shows their cumulative government bond purchase via QE:

When this new currency is created the market does not immediately react and adjust prices to compensate for the new currency in the system. This means the large funds, banks and companies that receive this money first in the form of bond purchases are at an advantage. They can, at first, purchase assets at prices that, by and large, reflect the value of currency before the round of QE.

As the additional demand created by the new currency is noticed by the market the prices of the assets they buy begin to rise. Eventually this will cause price rises across the economy in the form of inflation.

How QE Pumps UK Property Prices

The new currency created by quantitative easing increases the UK property prices in two major ways. Firstly, the new currency, over time, reduces the spending power of each individual pound. This means even if a property remains static in value, it’s price in currency will go up. Furthermore, because this new currency goes to funds and banks first that invest that money, this additional currency will impact the price of assets (including property), before it impacts the cost of consumer goods.

The second impact of QE on property prices is the realisation among high net worth individuals and investment funds that the value of their currency position will continue to go down. This forces them to move their money into assets with a limited supply. At the time of writing, Bitcoin, gold, silver and property are all up and I think this is no coincidence.

As Governments continue to print currency driving down its value, more and more value will be driven into the property market. If and when these continual rounds of QE result in massive inflation, even if property values go down, prices will go up!

As a side note: This blog has been listed on Feedspot’s Top UK Property Blogs & Top 10 UK Cryptocurrency Blogs lists. Thank you to them for listing us!

As previously discussed in this blog, currency printing drives down each units relative value. However, due to the current down turn in the economy the negative impacts of the addition of new currency may not immediately be felt.

Longer term though, this, combined with low interest rates is bad news for savers. The inflation caused by this move will mean that the purchasing power of your bank balance will shrink faster than normal. There are ways in which you can mitigate this risk which we will discuss later in this article.

Deflation Before Inflation

It is likely that we will see asset prices drop considerably some time in the short to medium term before we see the type of uncontrolled inflation some are predicting. This is because we are coming to a peak in a bull market and many assets are already overvalued.

A good example of this is Hertz which was able to convince speculators to buy new shares while it was filing for bankruptcy. The company has since suspended the sale following discussions with the Securities and Exchange Commission.

It is likely that this deflationary period will create many buying opportunities for the right assets. However, some companies with weaker fundamentals may not survive the downturn. It may also be a good time to start a business with the likes of Airbnb, CNN and Uber all being started during economic downturns.

Limited Supply

Precious metals and cryptocurrencies like Bitcoin have limited supplies and therefore may be used as a store of value to protect against excessive money printing.

Bitcoin was created at a time of economic crisis partly for this very reason. A message was added to the first Bitcoin block about this exact subject, you can read more about that in an earlier blog post.

UK Property

With a limited amount of space and a growing population the long-term prospects for property in the UK look good. That said, areas like London which appear to be reaching a peak in valuations are likely to take a hit. Areas like Peterborough, Hull, Sheffield, Burnley and many others look more promising.

During any deflationary period demand for HMOs is likely to increase due to downsizing and family breakdown. This coupled with the increasing number of Councils implementing Article 4 (requiring planning permission to convert a residential house into an HMO) is likely to increase the value of licenced HMOs in time. Of course, this is dependant on area and where property is already overvalued decreases in price are likely to be seen.

Protecting Against Inflation

You can also protect against inflation by ensuring that your money earns enough interest to be able to withstand the loss in purchasing power. Unfortunately, it is no longer possible to do this with a savings account at a bank. However there are options such as peer-to-peer, cryptocurrency-backed and private lending. You can learn more about them in the blog post entitled Beat The Banks – Earn 8%+ PA On Your Savings!