Wednesday, September 26, 2012

QE3 and property

QE3 is the Federal Reserve Bank's recently announced initiative to buy $40 billion of mortgage backed securities per month indefinitely until the economy improves.  The main goals of QE3 are to (i) improve the housing market by decreasing mortgage rates and boosting housing demand (ii) stimulate the economy by pumping money into the financial system.  The Fed hopes this would spur business investment and hiring.

Since with QE3 the Fed would be printing $40 billion per month and pumping it into the market, the supply of money increases.  This would result in higher inflation, whether within the Fed's target or outside the Fed's target.  Property prices (and rents) increase with inflation.  This is why property has always been an effective inflation hedge used by sophisticated investors.

Inflation happens because the price of housing, food, transportation etc increases.  Housing is the highest weighted component of the CPI calculation and accounts for 41% of the weight.

Wei Min Tan is Managing Director of Castle Avenue Partners and focuses on luxury condominium property as an investment in Manhattan, New York.  He is a sought after Manhattan property expert and often interviewed by the media such as the Wall Street Journal, CNN and New York Times.

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