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News | Question of the Week, WC 19th November
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Question of the Week, WC 19th November

Q:  Will the softening in the housing market depress the rate of increase of rents, which account for 41% of the core CPI?

A: The rate of increase of home prices is slowing under the weight of higher mortgage rates and rising inventory.  In the long run, home prices and rents move together, but it’s a very different story in the short- to medium-term.  Lower home prices reduce costs only for the marginal landlord acquiring a property. The carrying costs for other landlords, with fixed-rate mortgages, don't change. So the transmission from home prices to rents is slow, typically six quarters or so, as our chart shows.

Even then, wide divergences between prices and rents are not unusual, because the price data tell us nothing—directly, at least—about the other key factors driving rents, namely, the vacancy rate and the rate of growth of wages. Right now, the combination of rapid payroll gains and rising mortgage rates must boost the flow of potential new renters, just as multi-family home completions have flattened and real wage growth has risen. Accordingly, we see upside risk for the rental inflation over the next year, at least. 

Ian Shepherdson, Chief U.S. Economist

Pantheon Macroeconomics

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Posted: 23rd Nov 2018

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