Leading Indicators: Is the COVID-19 housing boom overheating the rental market?

You won’t need me to tell you that, despite the general collapse in economic activity through the COVID-19 pandemic, residential property prices have roared ahead pretty much everywhere. It is a story that’s never far from the headlines. And let’s be clear: the numbers are astonishing. In the US, the closely watched S&P Case-Shiller national index has climbed by almost one-fifth over the last twelve-months alone. Meanwhile, across the Eurozone, house prices are rising at their fastest pace since just prior to the onset of the global financial crisis. The Netherlands, Germany and Austria lead the way, posting double digit gains. Broadly similar trends are visible elsewhere, to a greater or lesser extent.

The reasons for this have been pretty well-rehearsed. They include the extraordinarily low cost of finance, and measures introduced by governments around the globe to mitigate the impact of the pandemic on the hardest-hit households. Separately, there has been a ‘race for space’ among those who added to their savings during the periods of restricted big-ticket spending occasioned by lockdowns. Moody’s has estimated that, at the height of the health crisis, “excess saving” amounted to circa US$5.5 trillion – some 6% of global GDP.

Rising house prices hold both an economic and political appeal for governments. The perceived link between net wealth, confidence and household spending is an important element in this; so too, crude electoral arithmetic. By pushing heavily on the housing lever through the provision of both direct and indirect support, policymakers clearly hoped to deliver real benefit for the wider macro economy. I would suggest that the measures were, on that criterion alone, a success.

But there are some more questionable implications of a sharp rise in house prices; none more so than the impact on crude measures of affordability. House price to income ratios may have their limitations as a means of assessing the issue, but they are a relatively simple and transparent method of doing so. They paint a very clear picture. OECD data for the second quarter of 2021 puts the aggregated house price to income ratio at 118.9. This compares with 106.3 a year earlier, marking a 12% increase. Significantly, the last time the metric reached this level was some fifty years ago. This is a somewhat misleading statement as regards affordability: mortgage servicing costs are at rock bottom levels making it relatively easy to finance a loan. But, for many potential buyers, obstructions to market-access persist in the form of ever-larger deposit requirements. In the UK, the Help to Buy policy partially addressed this issue in the new build market and will soon be replaced by a private sector initiative called Deposit Unlock.

It is fair to say that the spill over of demand into the lettings market has not yet caused a commensurate rise in rental values. But the sector is returning to some level of normality and moratoriums on eviction, where they were introduced, are now set to expire. Resultant, significant value uplifts are increasingly evident in new rental contracts. Zillow, a property website in the US, estimates that rents are up around 10% on a year ago. And the imbalance between demand and supply suggests that this strong trend will continue in many big cities around the world. If the starting point in terms of rent-to-income ratio was lower this might be less of a problem, but recent IMF research focused on Europe makes clear that this is far from the case.

Frustration at skyrocketing rents may just be bubbling over among those who see themselves as losing the property war. A recent referendum in Berlin returned a majority in favour of expropriating apartments from the city’s corporate landlords. The likelihood of this actually happening may be low, but the result alone demonstrates a not-so-subtle change in mood music. And of course, it is not just in Berlin that the issue of residential rents is becoming contentious. A wider debate about the issue is taking place in many large European cities including Paris and London, and in the US.