Landlords win again thanks to the central banks

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by Shaun Richards

A feature of the Covid pandemic has been the burst of housing inflation that has been engineered by the central banks and official policy. In a sense this is a surprise when you consider the scale and speed of the economic decline from which overall we have yet to recover. On the other hand I have long predicted that the central banks have house prices as their primary weapon these days as they look starry-eyed at the predicted wealth effects on their models. We can examine the effect starting with the UK from yesterday.

“Annual house price growth remained elevated in October at 9.9%, albeit marginally lower than the 10.0% recorded in September. Prices rose 0.7% in month-on-month terms, after taking account of seasonal effects. The price of a typical UK home has now passed the £250,000 mark, an increase of £30,728 since the pandemic struck in March 2020.” ( Nationwide )

They have kindly given us a marker as we note that UK house prices have risen by 14% since the Covid pandemic began. I will let that sink in as it is really rather extraordinary. When it began there was fear both for health and the economic impact and the latter was severe especially during the lockdowns. There were nuances to this as we had a stage where people were supposed to be fleeing the towns for the country but that seems to have gone rather quiet. One maybe more permanent change was the increase in home working which may influence property choices going ahead.

The Response

You may recall that the central banks arrived on March 19th 2020 like the US Cavalry under the banner of “market illiquidity”. This as I pointed out back then was dealt with by an increase in supply of US Dollars via the FX Swap arrangements of the US Federal Reserve. You may note how that subject has gone quiet when in fact it was the significant one.

What we also got was the following.

  1. Yet more interest-rate cuts
  2. More and indeed much more QE bond buying
  3. More credit easing such as buying mortgage-backed securities in the US, the -1% interest-rate for banks in the Euro area and the Term Funding Scheme in the UK

There was also the surge in fiscal policy that point 2 rather conveniently helped to make affordable and also made sure that there were buyers or in this instance a buyer for all the government bonds issued. Speaking of fiscal policy that also worked to boost the housing market as this from the UK this morning shows.

In late October 2021, following the end of the Coronavirus Job Retention Scheme (CJRS), it was estimated 87% of furloughed employees returned to work, 3% were made permanently redundant, 3% voluntarily left their role and 8% were classified as “other”.

Whilst the furlough schemes had other benefits they were for our purposes today a way pf making sure that mortgages and rent were paid. Indeed if you still were unable there were moratoriums on foreclosures and evictions. The band played on you might say.

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Just as a point on the UK CJRS what were/are the “other” 8% now doing?

House Prices and Rents

We can start with the US.

The S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index, covering all nine U.S. census divisions, reported a 19.8% annual gain in August, remaining the same as the previous month……After seasonal adjustment, the U.S. National Index posted a month-over-month increase of 1.4%, and the 10-City and 20-City Composites both posted increases of 0.9% and 1.2%, respectively. In August,
all 20 cities reported increases before and after seasonal adjustments.

It took its time ( a familiar tale) but this is now spreading into the rental sector.

Tampa Bay residents are seeing the highest rent surges in the country, according to real estate analytics.

“We’ve never seen this type of growth in Tampa before,” said Jay Lybik, CosStar National Director of Multifamily Analytics. “Tampa Bay is seeing rent growth twice the rate as the nation as a whole.”

The real estate analytics company found monthly prices for rental prices in Tampa Bay spiked 24.8% from July to September. According to Lybik, the rest of the United States saw an 11% increase.

“You can’t afford to live, but you can’t afford to not have a roof over your head,” Alison Hilbert said. ( Abc News )

CNBC has got itself all confused on the issue.

And over the last few months, DaCosta, a Pilates instructor, has been seeing the open apartments in her building go for rents just as high, if not higher, than they were priced pre-Covid. By her calculations, her current rent of around $1,900 could easily go up to $2,300 or more. That would force her to move.

“It’s just too much,” she said.

There is a lot going on here and whilst I wish Trish DaCosta well there was a clue in her original deal via the word discount.

Yahoo Finance have also been on the case.

Rents are up nearly 20% compared to last year, according to the latest rent report from Apartment Guide, and continue to push higher each month. The report, released on Oct. 29, compared rental price data from Apartment Guide and Rent.com between September 2020 and September 2021. Here’s how rent prices have changed for states that don’t have a low inventory of available rental units:

  • 1 bedroom: $1,660 average rent, up 19.8% from the previous year and 7.7% from the previous month
  • 2 bedroom: $1,964 average rent, up 18.9% from the previous year and 7.1% from the previous month

The other clear example is the Euro area which has joined this party with enthusiasm.

House prices up by 6.8 % in the euro area and by 7.3 % in the European Union in the second quarter of 2021, compared with the same quarter of 2020.

The nuance here is that this is driven by QE and credit easing because they already had an interest-rate of -0.5%. Although of course you can argue that the credit easing move of letting banks access credit at -1% was a type of interest-rate cut.

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Comment

As it turns out the case of Trish DaCosta is an example of how economies recover from a sharp decline like we saw. Housing gets cheaper so that people can afford it ( I am talking about both prices and rent) and this helps to fire up the economy and hence the recovery. These days such mechanisms are not allowed, or rather as they did happen briefly are soon curtailed. So the winners are those with property and increasingly as we note rents rising the buy-to-letters and landlords who get house price rises plus now higher rents. The losers are first-time buyers and those looking to trade up such as those with young families. There is quite a wealth transfer going on here.

Next we have the fact that the central banks now seem terrified to do anything about this. In about an hour we will find out whether the Bank of England has raised interest-rates ( the vote though was last night). Even if it happens a 0.15% rise to 0.25% is scratching at the surface especially as we note that 73% of mortgages are on fixed interest-rates now. So the correct response would be to end QE and wind down the Term Funding Scheme as the banks are awash with cash anyway.

Switching to the US a QE reduction of $15 billion per month ( so $105 billion this month and $90 billion in December) is fiddling at the edges. They should have just stopped. Frankly I am already wondering when it will start again?!

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