Quantitative easing is not the same as printing more money, although this is also an option open to central banks such as the US Federal Reserve and the Bank of England.
Quantitative easing on a large scale occurs when a central bank issues huge amounts of short-term bonds, which in turn enables them to buy back their own long-term bonds.
By doing this, bond yields and therefore long-term interest rates will decrease.
Ok, so what will that do?
Well, that would drive mortgage interest rates down and potentially kick start the property market. The downside for US importers is that this will also weaken the dollar – which of course, is an upside for investors seeking to purchase American property using GBP and EURO.
Issuing and then buying back your own bonds – sounds ridiculous doesn’t it?
I guess it does a little, but if you think about it, it is actually very similar to a regular person increasing their bank overdraft and using the extra money to pay back more of their mortgage.
It made sense for the Bank of England and Fed Reserve to do this, because interest rates were close to zero and mortgage rates for those trying to invest in property or get on the property ladder were often as high as 6-7%, which was causing huge friction in the stock markets.
As noted above, one of the side effects of quantitative easing is that it drives down the interest rates on their 10 year bonds, which are often linked to mortgage rates.
Decreasing long-term mortgage rates effectively puts more cash in people’s pockets that will hopefully encourage them to spend more.
Torcana Ltd is a property investment consultancy dealing with investments in foreclosed property, distressed property, and discounted property in USA, Spain, UK, and Panama. For more information please visit: - http://www.torcana.com
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